New Delhi: The global equity bull run is reaching its last lap and a high level of volatility is expected during 2008, but emerging markets such as India and China may again outperform the developed world this year, India’s biggest private sector lender, ICICI Bank Ltd, has said.
“The global equity bull run is showing signs of ageing as growth becomes scarcer. The period of spectacular returns and low volatility is behind us and 1H2008 (first half of 2008) could see high volatility in equity markets,” according to a report, Global Investment Outlook 2008, by ICICI Bank’s private clients division.
While earnings growth would shrink in G7 economies—the US, the UK, France, Germany, Canada, Italy and Japan—this along with inflation simmering in the background would keep equity markets on the edge, said Anup Bagchi, its head of global private clients.
“The global equity markets have been on a strong bull run for the past five years with some intermittent correction. The above-trend economic growth, impressive corporate earnings coupled with low interest rates and benign inflationary trends provided a sound backdrop for such an impressive bull run in the global equity markets,” the report said.
However, fears about a recession in the US, tight credit conditions and huge write-downs and losses at some of the big Wall Street companies have resulted in a worldwide sell-off and most of the markets have dropped 10-15% since the beginning of this year. The declines have been steepest for some of them since the 9/11 terror attack.
No decoupling: A stock broker at a brokerage firm in Mumbai. An ICICI Bank report says the emerging markets may not come out completely unscathed from the US weakness.
Noting that the developed world would see a slowdown in earnings and economic growth rates being played out in the coming quarters, the report said the “financial contagion would mean that emerging markets (EM) will not remain unscathed.”
“Yet, the ongoing correction means that the worry about the pricey valuations among the EM world would eventually be replaced with the attraction of better growth opportunities in these countries as compared to developed world,” it said.
“In other words, the intermittent corrections in the EM space could offer fresh buying opportunities,” the report said, but added that investors would need to be selective in the emerging markets space as well. “Countries that are less dependent on the US economy, or are facing lower inflationary pressures, or having favourable current account position, are likely to outperform in the coming times.”
India and China are favourably placed in this regard, especially after the meaningful correction in the recent past, Bagchi said in the report.
After a stellar 47% return over last year, the emerging trends augur well for India’s Sensex, it noted. “With 50% of population between 25 and 35 years, the channelling of savings into the equity markets is only going to increase (currently it is just 6% of the total savings and at an eight-year high). For example, there has been a 25% rise in total equity asset holdings of the mutual funds in FY07,” he added.
The report emphasized that the emerging markets might not come out completely unscathed from the US weakness, even as they are “much less vulnerable than history might suggest.” The micro and macro picture in the emerging markets is much more robust, which would allow the fiscal and monetary authorities to act proactively to the evolving environment, it added.