The Hindu Business Line : Where have all the bulls gone?

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Where have all the bulls gone?

FIIs are not very keen on the Indian growth story right now. A look at factors souring the success story.

Srividhya Sivakumar

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FIIs, the most important class of investors in Indian markets, are now having second thoughts about their India investments. This may come as a surprise since just last year the FIIs were all in praise of the India growth story and had gone on a buying spree across sectors and stocks. Quite a turnaround in outlook, you may think! But what drove this sudden change? Why are there no takers for stocks that were so sought after last year? A look at factors that could be weighing heavily on these big investors’ minds.

Growth story: losing steam

The Indian growth story appears to be losing steam and quite fast at that, if we consider the corporate earnings number.

The much-talked about Indian corporate earnings juggernaut has given away many clues that suggest an impending slowdown. While companies still continue to scale growth, it is the conspicuous slowdown in growth momentum that appears to have caught a good deal of attention.

After all, why remain invested in companies that may grow slowly over the next couple of years, when FIIs have access to companies across countries and sectors that promise higher returns?

But the slackening growth in corporate earnings is not the only reason. There is also the macro economic aspect behind the now prominent bearish outlook for India markets.

For one, it is the lower estimates of future GDP growth. Most leading multinational brokerage houses of high repute have downgraded the growth estimates of India’s GDP. How does this affect the markets? Apart from reiterating the consensus view of a slowdown in Indian economy, it also means that we may not see as much money getting pumped into the markets. FIIs appear to find investing in developed countries such as the US, which may be on the uptrend when compared to India, a more promising proposition. Agreed, India may still put up a healthy 8 per cent absolute growth in GDP, but remember that this is likely to taper, whereas developed countries could have just about begun their recovery. While it can be argued that the pessimism about Indian markets may have gone beyond levels of sanity, there is no denying that there is some element of truth in it. Not only has the IIP growth moderated in the last few quarters but there has also been an increase in the number of sectors that have witnessed negative growth in 2007-08 as compared with 2006-07. No wonder that some of the very names that were once cherished admirers of the India story have now “downgraded” the Indian market.

Overseas fund managers have pulled out over $3.03 billion out of Indian equities in the first three months of this year. And this is the first time foreign investors have been net sellers on a quarterly basis since the data was first compiled in 2000.

Soaring inflation

Most of the emerging markets are presently grappling with inflationary pressures. Thanks to the much-popularised ‘Chindia’ factor, prices of commodities worldwide have risen to new highs.

High commodity prices, in turn, threaten to pull down India’s growth potential. While India may be self-sufficient in food grains and commodities such as steel and aluminium, it bears attention that we are heavily dependent on imported copper, coking coal and edible oils. And with the demand for these commodities continuing to rise in emerging countries, high inflationary trends could well be here to stay.

This means that not only will Indian companies be forced to tackle high input costs but they may also suffer lower offtake in domestic demand.

Crude realities

The price of crude oil, which was hovering around the $70-mark last year, is now scaling new highs. Analysts are increasingly upping their target for this commodity, the last estimate being as high as $200!

High crude prices are a double whammy for countries such as India that depend heavily on the oil producing nations for its energy needs. And why is that so?

High crude prices would lead to higher import bills and that will subsequently widen the country’s fiscal deficit. And since oil continues to remain subsidised in our country despite the recent hike in domestic prices, any further rise in global crude oil price may only worsen the country’s economic health.

Besides, at a time when the Indian economy is already grappling with a slowdown, high import burden may only spell more trouble.

Yes, the government can abate the impact of higher oil price to some extent, by increasing the domestic fuel prices again, but then with General Elections round the corner, this appears quite unlikely. Moreover, any further increase in domestic oil price may only add to the country’s already soaring inflation. A catch-22 situation!

After suffering huge losses in the US sub-prime rout and global credit market crisis, foreign institutional investors cannot be blamed for their current lower appetite for risk.

Global risk aversion

And since investing in India appears laden with risks over the near term, incremental investments from FIIs may take time to happen. Indian markets’ valuations have corrected steeply in the last couple of months but it has been so for other emerging markets as well. Some analysts still feel that India continues to be at a premium!

Have the FIIs vanished from our markets for ever? Very unlikely, given that the economy still continues to grow. FIIs will once again pump money into India when its growth rate starts to accelerate relative to other economies.

Use this time to build a portfolio of all those dream stocks that, just a year ago, were beyond reach. After all, it is not every other day that such stocks are up for grabs.