One popular "investment theory" heard at South Mumbai cocktail parties is: 1) India will be the fastest growth emerging market (EM) for the next few years. 2) Hence, any global financial institution with EM allocations must invest in India. 3) These investments guarantee a buoyant stock market. 4) The bull market will therefore continue, unless the government does something stupid, or a "black swan" event like a big terrorist attack, or a war, derails all expectations.
Take those statements in order. The first is very likely, correct. India might or might not achieve current projections. But it should outperform other big EMs. China and Indonesia are in slowdown, Brazil and South Africa are stagnating. Russia has negative gross domestic product (GDP) growth. The second statement might not be true. Most FIs are near full-weight on India allocations. Many are India-overweight. They do not need to invest any more to maintain India weights in EM allocations. The third statement has some contingent ifs and buts. FI investments could flow into debt for instance, rather than equity. There are multiple caveats to the fourth statement. The Indian government, (or its arms), are capable of policy inaction, or poor policy formulation that drives investors away.
For instance, foreign institutional investors are unhappy about the MAT demands. Potential foreign direct investment (FDI) investors have been wary ever since the Vodafone, Nokia and Cairns cases. There is still too much red tape involved for somebody investing in India. Processes remain cumbersome. The government has not made doing business noticeably easier, yet. Unforeseeable shock scenarios are not easily quantifiable. There are lots of live-conflict zones around the world. There must be significant escalation risk, given conflicts in West Asis, North Africa, Russia-Ukraine, Nigeria, Af-Pak, as well as tension with Iran, North Korea, and territorial disputes in the South China Sea. It would take only one major blowup to hurt global sentiment.
There is a guarantee of high volatility across global markets on account of these conflicts, even if there are no major incidents. High volatility breeds its own problems with hot money moving quickly. Also, the global economy is driven by a fragile recovery across advanced economies like the US, Eurozone, Japan. Will this recovery sustain and strengthen? If there is a recession in any key area, the global economic scenario could change for the worse.
Finally, is the Indian bull market up and running at all? The Nifty hit an all time peak (9,119 points) in the week after the Budget. It has since retreated to the 8,300 level - a correction of nine per cent. That correction has wiped off all returns since January 2015. The Nifty has been flat in rupee terms and negative in USD terms since January 1, 2015. In contrast. China (+35 per cent in $), Russia (+31 per cent in $), and even South Africa (+3 per cent $) have yielded better returns in the same time.
Those data, suggest India's bull market is shaky and also indicates that the macro-economic growth scenario has no direct linkage with equity returns. Other EM stockmarkets could be as attractive as India, or more attractive, regardless of comparative GDP growth. Investors seek companies and sectors with good prospects, not for macro growth.
There is now an undercurrent of impatience in business circles. A few domestic entrepreneurs such as Deepak Parekh and Harsh Mariwala have articulated this cautiously. Eleven months after assuming office, the government isn't felt to be moving fast enough. The 2015 Budget disappointed due to the incremental approach. Jim Rogers, who's among the most respected of global commodity investors, said it more bluntly than local businessmen. In a recent interview, Rogers said Modi has not walked the talk. This is about perceptions. As of now, the majority of investors are hopeful that this government will be able to effect policy change for the better. If that perception changes, FII money will leave. An unwillingness by FIIs to sustain current commitment could lead to deeper corrections. If we discount the Sun Pharma deal (where an overseas strategic investor sold its stake to FIIs), April data indicates that FIIs were net sellers of Indian equity and of debt. This is the first month of net debt and equity sales since September 2013.
It is a pity the PM has put so much of his political equity behind the land Bill. If this fails to pass through the Parliamentary windmill, it will be taken as a signal of weakness. The focus should have been on lower-hanging fruits.
