The Hindu Business Line : Foreign brokerages turn cautious on India outlook

Mumbai, July 21 Recent developments in the country have made many foreign brokerages turning rather bearish review on India’s macroeconomic outlook. Inflation has reached new highs, fiscal risks are getting worse and financial assets prices are falling. The benchmark index, the BSE Sensex, has shed more than 40 per cent since it reached its peak in the beginning of the year, making it the worst performing market among the emerging markets.

“Local factors appear to be playing a more dominant role now unlike the first quarter of 2008 when global triggers held centre-stage,” stated a Sundaram BNP Paribas Asset Management report. It also mentioned that it will maintain a cautious stance on the outlook of both the economy and the stock markets over the next few months. The report also advised the investors to “scale up” exposures towards the second half of the year as by then the “bad news would be in the market and early signs of a recovery may be seen”.

HSBC Global Research has cut its end-2008 target of the Sensex to 14,000 from 17,500. They did so as they think that this is a bear market with significant risks — politics, inflation, monetary tightening by the RBI and slowing demand leading to margin squeeze for corporates.

In its recent report to its clients, Morgan Stanley stated that the valuations are reaching “fair level even though the fair value is at risk from rising bond yields and falling earnings estimates”. As for the earnings of the companies, the report stated that the “earnings season will start of well but we expect the overall reporting season to be drab”.

It also stated that technically our market seems to be sitting on support levels. According to the report, the bear market may not be over but some respite could be on the way and a 10-15 per cent rally is plausible.

Barclay’s Capital expects the country’s WPI inflation to touch 17 per cent by September 2008 and a repo rate of between 10.5-11 per cent by the end of the year. In its recent report it stated that it expects the fiscal deficit for financial year 2008/09 to be three per cent of GDP and rupee to weaken to Rs 44 in the next few weeks and to Rs 46 in the next six months.

Increasing risk

Rating agency, Standard & Poor’s (S&P), in its July 2008 report said it sees an increasing risk to India’s ratings due to rising fiscal deficits, rising inflation and widening current account deficits. “The coming weeks and months will be critical as national elections approach. Failure to respond adequately to negative developments as they arise in this pre-election period could point to a sustained deterioration in macroeconomic stability,” stated the report.

But it is not just India that has been downgraded by the brokerages, but many other markets have been downgraded too. A report by S&P stated that the second quarter of 2008 saw 291 rating actions across the globe, where it had 108 upgrades and 183 downgrades. “Following a rocky first quarter, the credit markets saw a continuation of the violent shakes that have almost become routine since this time last year,” said Ms Diane Vazza, head of Standard & Poor’s Global Fixed Income Research. “Overall, downgrades outnumbered upgrades in the US, Europe, and Asia-Pacific regions while the other developed regions and Eastern Europe/Middle East/Africa remained relatively benign.”

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