Poll worries to moderate foreign inflows

Reuters

A surge of foreign inflows that helped lift Indian stocks 40 per cent in eight weeks may lose steam on questions over valuations and the outcome of national polls, but the economy's prospects will remain a magnet for investors.

India has been a big beneficiary of optimism in world markets since early March that things were on the mend, with foreigners sending more than $7 billion into Asian stocks outside Japan in the seven weeks to April 24 as their risk appetite returned.

However, fund managers are cautious on further near-term gains for the broader market as the world's second-most populous nation votes against a backdrop of a sharply slowing economy.

"The general election in India is one event which many global investors want behind them," said Paul Parambi, head of international business for Kotak Mahindra Bank.

Another coalition government is expected, and analysts are worried that Congress, which leads the current coalition, or the main national opposition Bharatiya Janata Party may have to cede policy influence to smaller caste-based or regional parties to form a government.

That could delay privatisations and other planned reforms, such as an opening up of the banking and insurance sectors.

In 2004, when Congress won an unexpected victory but had to rely on communist parties for support, the stock market fell 17 per cent in two days to its lowest close for the year. But by the end of 2004, the market had risen 47 per cent from that close.

"You had your run and now you back off ... because you have to cross this event," said Samir Arora, who manages about $200 million at Helios Capital Management in Singapore.

Foreign portfolio investors have poured about $1.5 billion into Indian shares in seven weeks to April 23, trimming their net sales for the year to under $400 million, after selling $13 billion in 2008.

Indian shares have jumped from 2009 lows hit in early March, including a 17.5 per cent rise in April, its biggest monthly gain in 10 years.

Stocks such as outsourcer Wipro, India's top vehicle maker Tata Motors, top real estate developer DLF and engineering and construction firm Larsen & Toubro rose more than 20 per cent in the month.

Senior fund managers said investors were now making cautious forays into emerging markets such as India, but economic conditions were still too hazy to call it a revival, with the worries about swine flu an added concern for global markets.

Parambi, whose firm manages offshore client assets worth about $1.2 billion, said the market needed to consolidate to see significant further inflows.

Most of the money flowing into India has been into the stock markets, with bond investors wary of a heavy pipeline of supplies due to a worsening fiscal deficit.

Still, foreign investors have invested nearly $300 million in debt in April, trimming their net sales for 2009 to about $950 million.

RISING LOSSES, FALLING GROWTH

India's economy is expected to have grown less than 7 per cent in the 2008/09 fiscal year that ended on March 31, slowing from rates of 9 per cent or more in the previous three years.

And growth is expected to slow to a 7-year low below 6 per cent in 2009/10 as the global slowdown hits Asia's third-largest economy harder than expected.

Corporate results so far have not been encouraging, with nearly a quarter of the more than 150 firms to release March quarter results reporting losses so far, according to Morgan Stanley analysts.

Indian share valuations meanwhile have gone up sharply in the last two months -- the main index now trades at more than 13 times its 12-month forward earnings, up from about 9.5 times in early March -- moderating their attraction.

"I think people are reading too much into revival too early. I don't think it will last," said Jayesh Shroff, who manages about $1 billion in equities at the domestic mutual fund unit of State Bank of India.

However, India is still growing reasonably strongly and is one of the few emerging markets that could still show positive earnings growth for the year, analysts said.

"We think India's outperformance will continue," Sridhar Sivaram, who oversees about $2 billion in Indian equities at Morgan Stanley, said.

And with one in every six human beings on earth, a large domestic market and favourable demographics, India still presents an attractive long-term opportunity for global investors.

"Though we may see some caution from investors ahead of the elections, the outlook is still positive," said Callum Henderson, head of global FX strategy at Standard Chartered Bank, Singapore....