LONDON/MUMBAI: Soaring inflation and rate rises are starting to hit corporate margins in India, tempting more foreign fund managers to slash holdings in favour of markets that can better capitalise on the global economic recovery.
With oil and food prices not seen easing in the near future, money managers reckon the exodus has some more months to run.
This January alone, foreign funds have pulled $900 million from Indian equities, Thomson Reuters data shows. This contrasts with the record $29.3 billion they pumped in last year.
So a market that last year returned over 20 percent in dollar terms is down 8 percent this year — the worst performer of the four BRICs — Brazil, Russia, India and China – and one of the biggest emerging markets losers so far in 2011.
“The view is India faces a difficult year,” says Michael Penn , chief global equity strategist at BoA/ML. “It is the only underweight of the BRICs … and the size of that underweight is increasing, showing people are becoming more pessimistic.”
Underweight positions on Indian stocks have reached 35 percent on a net basis, the most since last April, BoA/Merrill Lynch’s investor survey showed in January. Compare that to November when 8 percent of foreigners were overweight India.
There are several reasons why the bulls are forsaking India.
The big one is inflation, with food price rises well in the double digits and a real risk this will spill into the economy. To counter this the Reserve Bank (RBI) raised interest rates this week, for the seventh time since March, to 6.5 percent.
The inflation is rooted in supply-side factors such as bad weather damaging crops and global prices that cannot be fixed by interest rates. But another 75-100 bps of tightening is expected with implications for consumer spending and corporate margins.
“As rates rise, margin pressures start to increase…we are starting to see earnings downgrades come through,” Penn said.
While most fourth quarter corporate results have beaten forecasts, seven of ten sectors have suffered margin contraction, a Morgan Stanley survey found this week.
The market is also pricy, trading 20 times 2011 earnings versus 12 times for emerging markets. With gains of 110 percent between end-2008 and 2010, it looked ripe for a reversal.
Michael Konstantinov , who runs $3 billion in BRIC stocks at Allianz RCM, recently pared India holdings in favour of Russia.
“You have the valuations argument, pressure from inflation, and on the monetary side there’s rising oil prices. So there are plenty of reasons to reduce your position,” Konstantinov said.