Mumbai: Indian stocks posted their worst quarterly performance in five quarters and were among the worst performers in the emerging markets pack for the quarter ended March. While India’s long-term growth story is intact, the near-term outlook for stocks does not look promising, investors say.
Investors have been concerned about political uncertainty in the world’s largest democracy after the Dravida Munnetra Kazhagam (DMK), which was an ally of the Congress-led United Progressive Alliance (UPA) government at the centre, withdrew support citing the government’s failure to condemn Sri Lanka’s human rights record at the United Nations Human Rights Council in Geneva.
Investors also fear that the interest rate easing cycle in Asia’s third largest economy could have come to a halt. Besides this, there are renewed worries related to corruption in the country.
“The market performance is likely to remain muted for a quarter or two,” said Amisha Vora, joint managing director of Prabhudas Lilladher Pvt. Ltd.
The concerns for Indian stocks partially stem from the overall shift of preference towards developed market equities from emerging ones as Asia’s third largest economy grapples with a host of concerns on the domestic front.
“We started the year with high hopes and FIIs (foreign institutional investors) also continued to pour in money. However, the macroeconomic situation did not improve and then the political uncertainty also cast its shadow,” Vora said. Experts had predicted the market could scale new highs as the reforms push made it one of the preferred investment destination among emerging economies.
The latest data on Thursday showed India’s current account deficit (CAD) zoomed to a record high of 6.7% of gross domestic product (GDP) in the third quarter of the current fiscal from 4.4% in the year-ago period and 5.4% in the preceding quarter, sounding a clear warning about the country’s vulnerability to external shocks.
“The short term outlook for Indian (stock) market is a bit pessimistic, considering the worries on the macroeconomic and the political front. The CAD data is definitely going to hurt the markets going forward and we could open in the red when markets open on Monday,” said Andrew Holland, CEO, investment advisory, Ambit Investment Advisors Pvt. Ltd. Indian markets are closed Friday for a holiday.
Experts also pointed that one of the key concerns was the lack of faith on the part of domestic investors—retail as well as institutional—as evident by their continued selling of Indian equities on bad news.
Foreign institutional investors have bought stock worth a net $10 billion this year, adding to the $24.5 billion of net investments in 2012. Domestic funds, on the other hand, have dumped stock worth a net Rs.41,011 crore since the start of 2013. They sold stock worth a net Rs.56,912 crore in 2012.
“We remain cautious on India equities,” JP Morgan analysts said in a 25 March note.
According to JP Morgan, the window for reforms is likely to narrow given a substantial political calendar, and the extent of the growth slowdown is being underestimated.
“There are limited policy stimuli—fiscal and monetary—available to boost growth over the near term. Our portfolio stance is defensive,” JP Morgan analysts added.
BSE’s benchmark 30-share Sensex declined 3% in the first quarter of 2013, its worst quarter since December 2011.
Indian equities were the third worst performer among their Asian peers. Malaysian stocks were hit the most with their benchmark index MSE Top 20 declining 11.7% so far in the year, while Hong Kong’s Hang Seng index declined 4.7%. Many markets in the world have completed the last trading day for the March quarter with markets being closed for Good Friday, while some have a day or two more to go.
Topping the list of best performers were South American and African stocks. Ghana topped the list with a 45.6% gain, while Venezuelan stocks, which had risen more than 300% in 2012, added another 31.5% this quarter.
The prominent BRIC markets, i.e. Brazil, Russia, India and China, suffered as the key indices in the four countries closed the quarter in the red. Brazil’s Bovespa index shed the most this quarter, as it dropped 8.1%. Russia’s RTS index shed 5%, while China’s Shanghai Composite declined 1.5%.
MSCI’s emerging markets index shed 2.2% this quarter, after gaining 15.2% in 2012. MSCI’s Asia ex-Japan equities index shed 0.7% in the March quarter, having added 19.4% in the previous year.
On the other hand, US equities are back in vogue, with the Dow Jones Industrial Average recording a new high in the quarter. It has gained 10.9% so far this quarter already.
“Our preference for developed market equities over emerging market stocks is driven partly by cyclical factors and partly by valuation differences,” Barclays Research said in a 21 March note.
The note issued by a host of regional analysts from across the globe said that the global economic recovery was led by the emerging market economies, and many are now facing capacity constraints that limit future growth potential. It said inflation concerns are preventing central banks in India and Brazil from easing policy to help spur weak economies, while in China authorities are focused on cooling the overheated housing market.
However, many feel India’s long-term story is intact and it could get back on track. For now, earnings and the monsoon are going to be the key factors that will decide the course of Indian equities.
“The long-term story holds for India, and we may see things improving by the end of the year if the monsoon turns out to be good,” Vora of Prabhudas Lilladher said.