The Hindu Business Line : India outperforms major benchmarks

Mumbai, Aug. 20 The Indian markets may have outperformed most countries and have posted positive returns on equity for the month of July, but analysts say that that the Indian markets are going through a bear market rally and that there are still risks for equities.

Though the Indian markets were one of the worst performing markets since the beginning of the year, they are now among few markets that have posted positive returns in the past one month.

According to the Merrill Lynch IST Report, out of 25 equity markets around the world in its Global Performance Matrix, India was among the three countries that posted positive return in equity for the month of July. India’s return on equity was 6.4 per cent, China 2.3 per cent and Finland 1.3 per cent.

“In a higher interest rate environment, any drop in crude prices will certainly help corporates through lowering of input costs and a commensurate gain in profitability. The revival of the monsoon and the current developments in the political environment, have helped the markets. Going forward, crude prices and any unexpected impact of the sub-prime crisis on India may impact the direction of the market.

“However, fundamentals remain robust and any sharp deviation in equity valuations can be perceived as buying opportunity,” said Mr Kaushal Sampat, Chief Operating Officer at Dun & Bradstreet India.

Negative returns

Russia posted negative returns of 16.1 per cent, Brazil posted negative returns of 10.5 per cent, USA -1.3 per cent, UK -4.2 per cent, Mexico -4.6 per cent and Japan -3.4 per cent, according to the Merrill Lynch report.

“We doubt that the bear market is over. Rallies are common in a bear market. Rapidly changing political equations are likely to keep markets nervous. A slowing economy, high inflation and monetary tightening are likely to lead to disappointing earnings growth,” stated the recent HSBC Global Research report.

According to an Enam Securities Research report, investors should use this bear rally to prune weaker/toppy trading positions and grab stocks as they crack to make trading profits, while picking up blue chips for the core portfolio if quality stocks also crack.

Mr Vijay Gaba, an Equity Strategist at DSP Merrill Lynch (India), advises the investors to allocate more to cash and then to bonds, to reduce the beta of the portfolio, to reduce value traps and not to read too much into value traps.

When compared with the BRIC countries, India has performed better than China but worse than Russia and Brazil, said Mr John Moore, Managing Director and Chief Executive Officer at KZen Equities.

“The Indian equity market has declined by around 25 per cent during the calendar year 2008, China by as much as 54 per cent, Russia by 23 per cent, while Brazil has proved to be more resilient with a drop of 14.5 per cent. The problems faced by our economy are no different from Brazil, Russia and China. However, the secret of Brazil’s resilience is its strong position in commodities be it energy, agro or metals,” said Mr Sampat.

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