Interest rates may have risen once again in China and it may be a while before the rate tightening cycle comes to an end in India but the Sensex has nudged past 19,000. With global fund managers veering round to the view that Emerging Markets (EMs) are a better bet than Developed Markets (DMs), more than $2 billion has moved into Indian stocks in the last nine sessions. In fact, EPFR Global data shows that fund flows returned to emerging markets in the three months to June, after outflows in the March quarter though the net inflows were not as strong as those in the last couple of quarters fo 2010.
The quantum of money that moved out of Bric markets was $849 million, a much smaller amount compared with the $2.3 billion that moved out in the March quarter.
Despite that, the MSCI US index outperformed during the period, coming off by just 0.28%, whereas the MSCI Emerging Markets index actually fell 2.1%. The trend could change since Citigroup believes Global Emerging Markets could return in excess of 20% for the rest of 2011. The factors in favour of EMs are of course stronger growth and consequently better earnings momentum; in markets like India earnings are tipped to grow by about 16% this year. That means the Sensex, at 19,078 levels, is trading at roughly 15.7 times forward which is well above the long-term historical average of 15 times. So, going by current earnings estimates for 2011-12, the market is no longer cheap though emerging markets as a pack remain attractively valued relative to DMs. For a market like India, perhaps one should ignore the near term and instead look ahead since the long-term outlook is very promising. Even if earnings grow by just 16-17% this year, it?s possible the momentum will be regained in 2012-13 after inflation is tamed and interest peaks. Going by the fact that bank stocks have done so well in the recent rally, investors seem to have shrugged off concerns that rising intrerest rates would hurt demand for money; SBI which still needs to clean up its books has rallied more than 15% while HDFC Bank hits a new lifetime high every other day.
Indeed, with a bit of luck, we could well see 18-19% growth in earnings for the Sensex set of companies next year and a better show from the broader market.
In the March 2011 quarter, net sales rose more than 22% y-o-y for a clutch of 2,413 companies while net profits rose 17% y-o-y, a fairly reasonable performance even though fixed capital formation in the second half of 2010-11 slowed significantly coming in at just 0.4% y-o-y in the three months to March.
Even without too much investment, GDP grew at 8.5% last year, so even if a few projects take off it could make a big difference to growth given that consumption demand will remain strong.
Of course, slowing global growth forecast at a slower 3.4% in 2011, after rebounding by 4.1% in 2010, may mean a slight slowdown in exports.
However, the recent decline in oil and commodity prices should help speed up recovery in western economies too. Indeed, as many have pointed out, the second half could be better for everyone.
