The Hindu Business Line : Market View

With returns of about 31 per cent year-to-date, India has been one of the strongest gainers within the region, placing its market valuations at a significant premium to other emerging markets. The high allocations for India in portfolio flows appear to be a reflection of the confidence that global investors repose in the "India story". The Indian economy and markets enjoy relative advantages — low dependence on exports or the US markets for growth, strong domestic drivers, relative political stability and a well-regulated stock market with reasonable standards of corporate governance. Unlike markets such as Russia or Brazil, the commodity cycle also plays a limited role in the health of the economy and in corporate earnings.

However, with market valuations once again in line with long-term averages, the situation calls for realistic return expectations and greater selectivity when chosing between stocks and sectors.

Franklin Templeton Investments

As far as the Indian markets go, the positives in the fall in commodity prices are about the impact on the current account (oil is 25 per cent of the import bill) and therefore on the inflation numbers (oil and commodities are 35 per cent of the WPI index). The benefits of lower commodity prices can therefore extend to better liquidity conditions and perhaps a lower pressure to rise interest rates, given the positive impact on inflation. It would be interesting to see how the lower commodity prices will play out on the equity and debt markets in India.

OptiMix View and Outlook

A series of structural changes over the last five years greatly insulate most countries in the EM (emerging markets) sector from the risk of a financial crisis. Nevertheless, a slowdown in the US will likely push emerging market external credit spreads wider from historical highs over the coming cycle as commodity price moderate, competing US corporate credit spreads come under pressure as the business environment weakens, and risk appetite moves off recent highs.

Those credits likely to fare best include countries that have minimised external financing needs (Brazil), built significant international reserves cushion (Russia), and have displayed monetary and fiscal prudence (Mexico). In contrast, countries with large external financing needs (Turkey) and large fiscal deficits (Hungary) may face challenges.

Pimco bonds, Emerging Markets Watch, September 2006

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