Financially, the worst is over

Article Published In ET on 05-01-2009

In 2008, financial markets around the world were a casualty of Murphy's Law - anything that could go wrong, did go wrong. Indeed, many things went terribly wrong.

Yet 2009 holds promise for emerging countries, including India, say financial market pundits.

Investor money will once again start flowing into India, says Jeff Chowdhry, head of emerging equities at the London-based F&C Investments. He believes while foreign large institutional investors are slightly biased towards China right now, the flip side is that, compared to India, the Chinese economy is more dependent on exports and the health of the US economy.

“The year 2009 will be one of volatility with two competing forces at play — global recession on the one hand, and the cash piles with fund managers, on the other. With central banks across the globe pumping in money, lot of it will find its way into the emerging markets. We will have short term money coming in by end-2009, whereby we could see markets end 30-40% higher from its current levels," Chowdhry said.

In 2008, foreign institutional investors pulled out $11 bn from the Indian equity market. So it may not be easy to reverse the flow in 2009. Portfolio investors say any recovery in India will have to be preceded by an overall improvement in market sentiment globally.

Yet the worst seems to be over, says the head of global financial services firm Morgan Stanley’s India arm Narayan Ramachandran. He believes the liquidity-boosting measures taken by central banks around the world would take effect by the second half of 2009. “There may be some small amount of pessimism left, which could play out in the next earnings season. However, the deluge of bad news and fear is behind us,” he added.

The recovery won’t start from equity markets however, as they are typically a dipstick for the overall mood in an economy. Other financial markets may need to recover before share prices start climbing. The credit market, for instance, may be among the first to start looking up, says Jyotivardhan Jaipuria, managing director and head of research at brokerage DSP Merrill Lynch. “This is the signal that the equity market will respond to, for it is a clear sign of increasing risk tolerance. Thereafter, one could see a reciprocal effect on equity and commodity markets,” he said.

“One factor in India’s favour is that it still has one of the best growth rates in the world. However, between Brazil, Russia, India and China, China is clearly preferred over India, given that China’s YTD (year-to-date) performance is worse than India,” he added.

Jaipuria believes there are two factors driving investor preference for China over India. First, India runs a large fiscal deficit and current account deficit unlike China, making pump-priming difficult. Secondly, the political fallout of elections here may make swift government action difficult.

Meanwhile, what should you do with your money in 2009? Morgan Stanley’s Ramachandran says a large share of the extra cash will find its way into gold and the credit markets. “Pockets of emerging markets” would benefit, he says. F&C is advising its clients to put money to work and expect returns only over two to three years.

Jaipuria recommends buying on bad news. He is optimistic about the prospects of telecom and drug companies, along with state-run banks. But for the long term, he is betting on automobile companies.


http://economictimes.indiatimes.com/articleshow/3935296.cms