Mumbai: Winter in Mumbai has been colder than usual this year and the chill seems to have rubbed off on Dalal Street, with foreign investors turning net sellers of Indian equities in January and the bellwether equity index of the Bombay Stock Exchange, Sensex, dropping 10.3%.
Also See | January Jinx (PDF)
This is the highest monthly loss in the past 28 months, and the January blues have become a feature four years in a row.
Persistently high inflation and uncertainty on policy reforms have raised the possibility of a moderation in growth and corporate earnings, and have sparked a sell-off by foreign investors.
Foreign institutional investors (FIIs) turned net sellers for the first time since the Greek debt crisis in May. They sold $912 million (Rs4,168 crore) worth of equities net of purchases so far this month.
While many analysts expect the markets to remain weak till inflation tapers off and the interest rate cycle peaks, they remain optimistic that foreign investors would resume buying in the next quarter as valuations become more attractive and greater clarity emerges on earnings growth for fiscal 2012.
If past trends are anything to go by, they may well be vindicated. The first quarter has been the weakest for Indian markets with negative performance in six out of 10 years, wrote Tirthankar Patnaik and Manoj Singla, strategists at Religare Capital Markets Ltd, in a 27 January email to clients.
Higher foreign flows towards the end of each year and a brief break before a February Budget rally could be some reasons for the January effect.
While January has been a weak month for Indian markets the past four years, 2011 stands out for the underperformance of the Sensex relative to the MSCI emerging markets index. In the past few years, the Sensex’s fall was largely in line with other world markets.
Macroeconomic concerns arising out of high food inflation that has touched 15%, the spike in prices of global commodities, and the current account deficit that’s hovering at 3% of India’s gross domestic product (GDP) have added to the concerns on the political stalemate in Delhi.
“There are multiple headwinds on the political and economic front and with five assembly elections coming up this year, policy reforms that could have aided growth could well be deferred,” said Sadanand Shetty, head of equities at Taurus Asset Management Co. Ltd, which has Rs2,694 crore under management.
Expectations of a faster global recovery has helped developed market equities and export-oriented markets gain at the expense of emerging markets such as India and China, which are battling inflation concerns.
This month saw the highest outflow of $3 billion from emerging markets since mid-2008, said a 28 January note by Markus Rosgen, Asia strategist at Citigroup Global Markets. “Korea and Taiwan gained at the expense of India and China,” said Rosgen.
The International Monetary Fund has raised its global growth estimate for 2011 to 4.5% from 4.25% earlier, leading many analysts to predict that commodity prices are unlikely to cool off soon.
Rising crude oil prices would also widen India’s fiscal deficit, another major source of worry with wage indexation in the rural wage employment scheme adding to the higher costs of food and fuel subsidies.
“The negatives in terms of rising interest rate hikes are already factored in,” said Rajesh Mayani, managing director, institutional equities, at Standard Chartered. “It is too premature to say if earnings growth would be lower...we have to wait till there is further clarity on inflation and growth numbers.”
Though inflation-induced monetary tightening raises the risk to India’s growth and corporate earnings, fund managers swear by India’s growth story.
“India would still be the second-fastest growing economy even with 8% GDP growth and that would attract inflows,” said Krishna Sanghvi, head of equities at Kotak Mahindra Asset Management Co. Ltd.
“However, rising interest rates can slow down the revival in the capex cycle and that is a cause for worry,” he added.
Harendra Kumar, head of research at the Indian arm of the UK-based investment bank Elara Capital Plc., said he does not expect the Sensex to fall below 16,000 points even if the current downtrend continues.
From its recent peak of 21,005 points on 5 November, the Sensex has lost 12.5%.
Ashwin Ramarathinam contributed to this story.
Graphics by Yogesh Kumar/Mint