Merrill Lynch and Co. strategist Mark Matthews has a checklist for investors in India and China.
If the price of oil goes below $120 (Rs5,040 today) a barrel (from about $126 on Wednesday), if China’s annual inflation rate slows to 5% (from 7.1% last month), and if the US banking crisis comes to an end, then the sagging fortunes of equity markets in the two Asian countries may reverse in relation to their better-performing “Bric” cousins: Brazil and Russia.
At the beginning of this year, Indian and Chinese stock markets, taken together, were almost three times as large as the combined value of shares traded in Brazil and Russia.
Since then, the gap has almost halved.
Brazil’s Bovespa Index, the world’s 10th best performing, has risen more than 5% in US dollar terms this year, while Russia’s Micex Index has declined 11%.
By comparison, Indian and Chinese benchmarks have taken a hammering, falling 36% and 42%, respectively.
Bric has become “BR-IC”: two disjointed halves.
With runaway commodity prices, such an outcome was only to be expected. After all, Brazil and Russia produce a lot of the stuff that 2.3 billion people in India and China guzzle.
By contrast, Indian and Chinese energy and resource producers have little exportable surplus and are forced to satisfy domestic demand at less-than-remunerative prices.
These firms have, therefore, been nowhere as appealing to investors as their counterparts in Brazil and Russia.
Templeton Asset Management Ltd’s Mark Mobius said this week that Indian and Chinese shares offer “good bargains”.
On 16 July, the average price-earnings multiple for India’s key equity index fell below 13, making the underlying stocks less than half as expensive as they were at the start of the year. In the five trading sessions since then, the benchmark has risen 19%, including a 6% gain on Wednesday.
The Chinese index is valued at 21 times reported earnings, the lowest in more than two years.
Still, it’s hard to say with any degree of confidence if the stock market tide is about to turn in India and China.
“The best we have is anecdotal talk of some investors being worried about the crowding in energy, and others sniffing around the edges of Asia,” Merrill Lynch’s Matthews said on Wednesday in a report he wrote with his colleague Daniel Casali.
“When the stock markets of China and India start to outperform those of Brazil and Russia, it could well be a sign the environment is changing,” the Merrill analysts said.
Or perhaps the environment will change.
Investors in India and China should be happy that the political rhetoric and the policy environment in the US are becoming increasingly intolerant of speculation that doesn’t suit that country’s short-term economic interest.
The US Securities and Exchange Commission last week banned so-called naked short sales in shares of Fannie Mae, Freddie Mac and 17 financial firms.
Meanwhile, from capping the number of contracts per investor to making traders report their holdings, lawmakers in Congress are considering as many as 15 proposals to pull oil prices down by legislative action.
Oil has dropped 15% from a record $147.27 on 11 July. Metal prices, too, are beginning to ease. Cooling commodity prices may play a role in narrowing the gap between stock market performance in Brazil and Russia on the one hand, and in India and China on the other.
However, equity investors in India and China have been spooked by a surge in inflationary expectations that were left unchecked for far too long by authorities in their blind pursuit of growth. Policy makers will now have to suppress inflation decisively to win back the confidence of investors.
Some amount of economic slowdown is already evident in India and China. Whether that’s enough to rein in domestic price pressures still isn’t clear.
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