Despite decline, Indian markets outperform Asian peers in 2014

Corrective decisions taken by the Reserve Bank of India (RBI) in managing the currency from slipping further aided sentiment

The 2014 calendar year (CY) has not been too kind to the equity markets across the globe, especially the Asian region with Shanghai Composite, KLSE Composite, Hang Seng and Straits Times losing considerable ground year-till-date (YTD).

India, with its two main indices – the S&P BSE Sensex and the CNX Nifty – has performed better on a relative basis as compared to most Asian peers thus far in CY2014. Foreign institutional investors (FIIs) have invested Rs 3,277 crore ($532 million) in the Indian equity market till January 27, according to the Securities and Exchange Board of India (Sebi) data.

The recent sell-off looks to be the product of retail investors heading for the door in the wake of a plethora of worrying emerging market (EM)-related headlines and tapering of the bond buying programme by the US Federal Reserve, analysts say.

“The recent rout has variously been attributed to concerns related to Fed tapering, fears of a Chinese slow down, worries over the default of a Chinese fund company as well as jitters relating to specific EM events whether it be political unrest in the Ukraine and Turkey or the slide in the Argentinian peso,” suggest Richard McGuire and Lyn Graham-Taylor of Rabobank Financial Markets Research.

According to Stephen King, chief global economist at HSBC, with the US Federal Reserve now tapering its asset purchases and with long-term interest rates rising in the developed world, flows have begun to dry up. The result has been downward pressure on currencies, upward pressure on domestic funding costs and, as night follows day, a slower pace of economic growth. Longer term, however, prospects for the emerging world remain encouraging, he says.

Relative outperformance
One of the fundamental factors why the Indian markets have fared better than the other Asian markets is the corrective decisions taken by the Reserve Bank of India (RBI) in managing the currency from slipping further, analysts say.

“The restriction on gold imports and the corresponding fall in the current account deficit projection has also helped India perform better as compared to the Asian peers that have seen their respective currencies slip six–eight per cent against the dollar,” says Deven Choksey, managing director and chief executive officer, K R Choksey Shares and Securities.

Analysts say the markets are likely to remain volatile in the coming days as they re-assesses both the potential impact of continued Fed tapering on various EM currencies and also the debt and growth situation in China.

“The sharp risk-off sentiment across EMs in the last week has seen contagion across asset classes and regions, and Indian markets were no exception. We do not expect the sell-off to sustain on sentiment alone, but would remain cautious on the markets and from a sector perspective, partial towards IT services and pharmaceuticals over financials,” said Tirthankar Patnaik, director – institutional research, Religare Capital Markets.

Eye on elections
As regards India, foreign inflows into the equity market appear to be chasing the prospect of a supposed game changing BJP (Bharatiya Janata Party) election victory next May, with the party’s strong performance in recent state elections boosting these hopes, analysts suggest.

Points out Ambareesh Baliga, managing partner – global wealth management, Edelweiss Financial Services: “I don’t see much downside for the Indian markets from here on. Markets have usually rallied ahead of the elections and this year will be no different. Most opinion polls are predicting BJP-led government at the Centre and that’s what the markets also want.

Rajesh Cheruvu, chief investment Officer, RBS Private Banking, India, expects India Inc to embark on a capex drive if changes in the political environment lead to more corporate-friendly policies from the middle of 2014 and these factors would attract foreign investors and result in a surge in equity markets. India will also benefit from the global liquidity which will keep the rupee afloat coupled with RBI’s efforts to build up the reserves, we expect the rupee to appreciate to 58 against the dollar in the later part of the year, he says.