If the markets are shrugging off bad news it?s probably because it?s had an overdose; the Street now wants to believe the worst is over and look ahead. Alas, there?s not much to cheer about right now after the US has lowered growth forecasts for both 2011 and next year and the slowdown evident in China except of course easing crude oil prices.
Back home, the hike in prices of diesel is only going to push up prices of other goods pinching an already harassed consumer.
More importantly, while inflation will now most certainly rule at 9%in the first half of 2011-12 as anticipated by the Reserve Bank of India (RBI), the worry is it could remain at those levels even after September. Rohini Malkani of Citigroup believes that inflation could be closer to 8.5% in March 2012, rather than the 6.5% that the RBI was hoping for. More worryingly, she feels RBI?s anti-inflationary stance could result in a further elongation of the rate tightening cycle, a 50 basis points hike in policy rates now a given. Of course, it is the intention of the central bank to restrain demand to tame inflation even if it means sacrificing some amount of growth. But the Street seems willing to live with an 8% or so GDP number which in the context of growth in other economies is a very good performance. Indeed, the bond markets too haven?t been nervous with yields having risen just a couple of basis points. That despite the fact that the higher-than-expected fuel subsidies, together with losses from customs and excise duties, could push up the fiscal deficit to 5.8% of GDP, more than100 basis points higher than the government?s estimate.
After Monday?s rally, India?s performance this year doesn?t seem as bad as it was last week, although it still remains among the worst performing markets. The Sensex has now given up about 10.2% between January and now while the Shanghai SE Composite has given up just about 1.8%, the Korean Kospi is up about 1% while the Taiwanese market is down just over 5%. Money continues to move out of Emerging Market Equity Funds ? funds tracked by EPFR have seen outflows for the fifth time in the past six weeks ? and in the week to June 22, both India and China funds saw money move out.
However, it?s not as if foreign investors are rushing to the exit. On the contrary, institutional investors are beginning to see value; after several months FII flows turned positive on Monday though compared with the kind of money that came in last year, it?s not even a drop. Given the macroeconomic concerns and the earnings downgrades, fund managers are not likely to rush in because with earnings estimates for the Sensex in 2011-12 at somewhere between 1,225?1,235, the market is trading at around 15 times forward. That?s not unreasonable though it is slightly more expensive than peer markets.
However, if one was to look further ahead, corporates should be able to come up with reasonably good numbers in 2012-13 with inflation tapering off and interest rates too.
So, while things look rather bleak just now the markets may just take it all in its stride.