If the projections made by the International Monetary Fund (IMF) are any good, investment growth in India will slow dramatically this year and the next. According to IMF’s Regional Economic Outlook for Asia and the Pacific published recently, the year-on-year growth in investment is expected to more than halve from 15.9% in 2007 to 7.6% this year.
The international financial institution forecasts that investment growth will recover a bit to 9.7% in 2009. Export growth, on the other hand, is expected to rise from 7.7% in 2007 to 8.5% in 2008 and to 10.8% in 2009. Also, private consumption growth, which was 6.9% in 2007, will go up to 7.4% in 2008 before cooling to 6.9% in 2009.
These trends forecast for the Indian economy vary strikingly with those forecast for the rest of Asia. For example, investment growth in emerging Asia, excluding China and India, is higher in 2008 and 2009 than in 2007. China’s investment growth, too, is forecast to be higher than in 2007. Similarly, for export growth, the Indian trend is opposite to that for other countries in the region. The same holds true for private consumption growth, which is expected to slow down for most countries in the region.
The report doesn’t really explain these trends for India, other than pointing out that “India’s growth is expected to decline by 1¼ percentage points to 7.9%, driven by a slowdown in investment on tightening credit conditions. Fiscal stimulus will provide a partial offset.”
Are these trends being reflected in the domestic data? If you consider the Index of Industrial Production (IIP) data for February, you’ll find growth in capital goods has slowed from 18% in February 2007 to 10.4% in February this year. At the same time, growth in consumer goods was 9.2% in February, compared with 7.4% a year ago.
The February numbers certainly seem to corroborate the trends forecast by IMF. In the stock market, the poor performance of capital goods stocks has so far been attributed to their high valuations and to the fact that they were over-owned. The IMF projections provide a more “fundamental” basis for their underperformance.
IT rally’s all about ‘relative attractiveness’
The markets don’t seem to be getting enough of IT shares ever since Infosys Technologies Ltd gave a better-than-expected guidance for the year till March 2009. The CNX IT index has risen by 12.5% since, while Infosys itself has risen by as much as 17%. The Nifty has risen by less than 4% in the same period.
But what’s interesting is that there haven’t been any material earnings upgrades since the results’ announcement. Analysts estimates of Infosys’ fiscal year 2008-09 earnings were already higher than the target of Rs92-94 set by the company. So it’s not that stock prices are adjusting to discount higher earnings in the future, but just that a higher valuation multiple is being assigned. Infosys traded at 18 times trailing earnings prior to the current rally, and now trades at 21 times trailing earnings.
The sudden interest in IT shares points to the lack of decent buying opportunities in the market. The head of research at a domestic brokerage explains that there are few good buying opportunities in the market and that the rally in IT shares is all about relative attractiveness.
Since interest rates are expected to harden, sectors that are sensitive to interest rates, such as auto and real estate, are not in favour. Until the recent spurt in inflation, there was at least the hope that interest rates may soften and stocks in these sectors would do well.
Commodities such as cement and steel are facing increased interference from the government on not only pricing, but also with respect to a ban on exports.
Most of the stocks that have risen in recent times were on account of company-specific developments, such as the possibility of an open offer in Orchid Chemicals and Ranbaxy’s settlement with AstraZeneca for exclusive rights to sell the generic version of ulcer drug Nexium for a 180-day period.
In such a scenario, the markets gladly lapped up Infosys’ assessment that things will improve in the second half of the year, although near-term concerns remain. IT shares have now outperformed the Nifty by about 21% since January, when the markets started correcting.
The Infosys guidance seems to have reinforced the view that IT stocks are a defensive bet in the current uncertain market.
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