Column : The money?s there, chase the projects

It?s been quite a spectacular year for the Sensex. Even if the market hasn?t outperformed all its peers, the benchmark has returned a reasonably good dollar-adjusted return of 18.5%, in the process scaling a new peak. And notwithstanding the end of the Goldilocks-like environment, in which domestic demand remained strong but the cost-push impact was subdued, thanks to a weak global economy, India remains a good bet for investors. For sure, the growth momentum could taper off in 2011-12 with GDP coming in at 8.3-8.4%, as it probably would in the rest of Asia, too, primarily because global recovery seems to be delayed and also because a tighter monetary policy could hurt domestic demand at the margin. But an upturn in the investment cycle, momentum in consumer demand and an improving world economy should give the GDP a push in the following year, so that it clocks a growth of close to 9%. In this kind of a scenario, India should continue to be among the fastest growing nations and it?s precisely this that has pulled in foreign portfolio flows of about $29 bn in 2010, driving up the country?s market capitalisation to $1.6 tn.

At a broader level, the contrast in the economic and credit outlook between emerging markets (EM) and the advanced economies is becoming more pronounced, thanks to the deteriorating public finances of several European nations. Fitch reported last week that while capital flows to fast-growing EMs do pose challenges, with respect to monetary and exchange rate policies, the outlook for EM sovereign credit ratings is broadly positive. So several EMs, especially India, could continue to get re-rated. Currently, the majority of fund managers globally are underweight for a variety of reasons. Data suggests that global funds or those benchmarked to the MSCI World, put together, have about 0.65% of their assets in India, implying an underweight position of 0.38% compared with the benchmark weight of 1.03%. As such, even increasing the weightage to neutral could mean an additional inflow of nearly $7 bn, going by the fact that these funds today have a corpus of over $1.5 tn. It?s these expected inflows that may drive up market capitalisation of countries like India; Goldman Sachs projects that the BRIC countries will have a 30% share of world equity capitalisation by 2020, from 18% currently. Indeed, with the liquidity from QE-2 expected to leak into EMs rather than find users in the US, it?s possible the share of BRIC nations will go up faster than expected. In India, strong corporate earnings, estimated to average 20% for the broad market over the next few years, should support a P/E growth of 20%, so that the market continues to trade at least at current multiples.

Among the biggest pickings from the market have been by the government, which has almost pulled off its Rs 40,000 crore disinvestment target for 2010-11. But India Inc has gained enormously from the approximately $80 bn or so that foreign funds have invested in Indian equities between 2004 and now, and from the contribution of domestic players, both institutional and retail. If a Coal India shovelled Rs 15,000 crore into its kitty, DLF went home with Rs 9,000 crore-plus in June 2007, while Reliance Power had investors all charged up with its Rs 11,500 crore IPO in early 2008. Even when the chips were down, after August 2008, blue-chip companies like Tata Motors and Hindalco were able to pick up money from the markets. With the wealth effect growing, there will only be greater retail participation in the Indian markets, whether directly or via mutual funds and insurance companies, and this will supplement foreign flows.

The short point is that firms need not fear being short of equity; the Indian market today is a good hunting ground for risk capital and that?s good news for investment, which doesn?t seem to be doing well. From the average of 18% during March 2004-March 2008, growth in real investment turned negative to -1% during the global financial crisis; the average growth has rebounded to 11% in the last three quarters (December 2009-June 2010) but remains below the pre-crisis period average. That?s despite the fact that corporate balance sheets are in great shape with a fourth of all companies sitting on cash surpluses and the cost of capital, while rising, still relatively low. The market, however, is clearly willing to back investment; newcomer Adani Power walked away with no less than Rs 3,000 crore. Now it?s up to India Inc.