Domestic equities have been laggards in the latest market surge, triggered by a host of reasons such as progress in the US-China trade talks, earnings optimism, and the easy monetary stance taken by the US Federal Reserve.
Emerging markets (EMs) have been on an upmove since August-end, gaining over 10 per cent. During the same period, Indian benchmarks have gained only 8 per cent. Had it not been for the corporation tax rate cut, the indices could have been trading in negative territory.
While India has benefited from the improvement in global investor sentiment, domestic issues such as weak economic growth, crisis at non-banking financial companies (NBFCs), and rising corporate defaults have weighed on performance.
India’s EM peers, such as South Korea (up 16 per cent in three months), Taiwan (up 15 per cent), Mexico (up 11 per cent), and Brazil (up 10 per cent), have all managed to post a far better performance, signalling a shift in investor preference.
Following a sharp sell-off in July and August, amid the fear of recession and a flare-up in US-China tensions, risk assets have staged a strong comeback.
A rate cut by the US Federal Reserve, progress in trade talks, and the Brexit deal have benefited both developed markets as well as EMs, say analysts.
“Things were bad for Indian markets till the government came up with the tax cuts announcement. Globally, noises regarding the China-US trade deal helped improve risk sentiment,” said Andrew Holland, CEO of Avendus Capital Market Alternate Strategies.
Experts said that markets that have positioned themselves to benefit from the US-China trade rift have benefited over the past few months.
“A lot of countries in the EM basket are big exporters. Their valuations are relatively cheap. They responded positively to the trade war situation, and are likely to end up as big beneficiaries,” said Holland.
In the past, Indian markets were seen as the most-preferred bits among EMs. However, given the domestic headwinds, the favourite-tag seems to be diminishing, as markets have been reeling under one crisis after the other. June quarter earnings of most firms failed to meet the Street’s expectations, thus forcing analysts to cut their earnings growth targets for 2019-20.
During the quarter ended June, India’s gross domestic product grew 5 per cent, which was well below the median estimate of 5.7 per cent.
Further, the liquidity crunch at NBFCs and rising instances of corporate default added to investors’ woes. Investors were worried that bad loans might spike following the turmoil in key NBFCs and real estate entities, weighing on key banking stocks.
“The banking and financial services sector, among the most important in the investment space, continues to suffer. The problems are yet to be sorted out. This was the favourite sector of global funds and FPIs already have a significant stake in the sub-sector, private sector banks. Despite all this, the markets are not far off from the all-time high, and unless there is a real turnaround, further gains may be difficult to come by,” said U R Bhat, director at Dalton Capital India.