Credit costs, liquidity controls seen hurting growth in profits

Credit costs, liquidity controls seen hurting growth in profits

Mumbai: Rising credit costs and tighter controls aimed at tightening liquidity in an economy trying to fight inflation will slow down corporate earnings growth in India, a leading economist in the region said, predicting a slowdown in earnings expansion to about 10% in the fourth quarter of fiscal 2008 down from the 15% to 17% rise in profits in earlier quarters this financial year.

The political risks in India—rising from the Congress-led Union government’s differences with its communist allies over a nuclear deal that New Delhi is pushing for with the US—could negatively impact the country’s equity markets and its currency, said Adrian Mowat, chief Asian & emerging markets strategist, JPMorgan Securities (Asia Pacific).

The outlook was weakened with the risk of a recession in the US, the world’s largest economy. There is “a 30% chance of recession in the US economy," the JPMorgan strategist said. This could, in turn, drag down equity markets across the globe.

“I expect the S&P (a key global equity index) to be trading much lower in the next few months." The Standard & Poor’s 500-stock index was trading at 1,471, up 0.4%, in early trades on Wednesday.

If the US market contracts, it is bound to have a ripple effect on other equity markets.

JPMorgan has revised down its US gross domestic product (GDP) growth estimate in the last quarter of calendar year 2007 from 2.5% to 2% while that of the first quarter of 2008, has been slashed from 3.5% to 2.5%.

Mowat identifies four major signs of stress—falling mortgage purchase applications, job contraction, softening house prices and easing consumer confidence—as an indication of a potential slowdown in the US.

The financial markets have fully priced in a 0.25% cut in interest rate by the Federal Reserve later this month and a 0.5% cut by the end of this year. This has downside risk if the Fed does not cut rates or issues a hawkish statement, Mowat said..

Still, Mowat noted, Asia’s direct economic exposure to the US has decreased over the past five years and Chinese stocks are predominantly domestic demand oriented.

“There will be a spillover effect from Chinese equity markets to other key markets in Asia," he said. But, “if confidence in global markets weaken, it will affect the Indian rupee and could lead to a sharp correction in its value."

“The IT (information technology) sector in India, which derives most of its revenue from US companies could be affected by this potential slowdown in the US economy. US companies will take a wait and watch mode before spending on IT, to study the situation deeper," Mowat said.

Investment bank Morgan Stanley’s benchmark MSCI—short for Morgan Stanley Composite Index—for India has underperformed key emerging markets and global market indices in the past one month, the head of JPMorgan’s head of equity research Bharat Iyer wrote in a report on 7 September.