As emerging markets trail, fund managers likely to be wary of India
PremiumNear-term risks for Asia continue to remain high, making it unappealing for investors
With India gradually losing foreign institutional support following concerns over the second wave of covid infections, the slow pace of vaccination and a steep increase in inflation, fund managers are expected to be selective and cautious. While Asia outperformed the US and Europe early on in the pandemic through 2020, the situation has reversed this year. Vaccination rates are severely lagging developed markets across most emerging markets, while India is witnessing the worst surge in covid cases and deaths.
“Asia or emerging markets (EMs) equities significantly underperformed global peers in the last six months and some of the valuation excess has abated. We therefore now move equal weight (rating) on EM versus DM (developed markets) equities in aggregate, with Europe the most preferred global equity region across the strategy team," said analysts at Morgan Stanley.
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According to the global brokerage firm, near-term risks for Asia and EMs remain high, including covid vaccination and variant dynamics, dwindling policy stimulus, internet sector regulation in China and round-tripping last year’s pull-forward demand in IT hardware. “Fund flows to Asia/EM have turned neutral and seasonality is unappealing for the next few months," it added.
Ridham Desai, analyst, Morgan Stanley, said India is a stock pickers market. “Cross-asset and sentiment indicators are neutral on equities. The challenge for stocks comes from waning liquidity and valuation support."
So far this year, MSCI World index, which represents large- and mid-cap equity performance across all 23 developed markets, has rallied 9.41% outpacing MSCI Emerging Markets, which rose just 3%.
But India has stayed somewhat resilient with its benchmark index, the Sensex, gaining around 6% (in dollar terms) so far this year. The aggregate market capitalization of all-listed companies on the BSE hit a record $3 trillion on Friday. Indian equities have lost foreign institutional investor (FII) money worth nearly $2 billion in April and May after continued inflow since October.
Pratik Gupta, chief executive officer and co-head, Kotak Institutional Equities, said in the near term, the risk will come from the delay in the widely expected vaccination ramp-up, or if vaccines prove ineffective in preventing the virus’s third wave. “A more fundamental longer-term risk could come from a faster-than-expected rise in global and domestic interest rates, which would impact all EMs, including India. Other risks to bear in mind are a rural slowdown (due to the impact of the virus) which may get worse if the monsoons disappoint, a spike in global oil prices, and any populist government action ahead of UP (Uttar Pradesh) elections next year," Gupta added.
A key concern among Indian fund managers, while allocating money into equities, is that rising commodity prices may lead to inflationary pressure. According to a BofA Securities fund manager survey, published last week, 35% of respondents said inflation could be the biggest tail risk to their portfolios. A record 69% of those surveyed expect a scenario of high growth and high inflation, going ahead.
“If inflation shoots up globally and the Indian rupee comes under pressure, we may see some FIIs sell off; we are monitoring these risks," Jitendra Gohil, head, India equity research, and Premal Kamdar, equity research analyst, Credit Suisse Wealth Management, said in a report on 18 May. They said the impact of the second covid wave of on the Indian economy and inflation are key risks for Indian equities.
A downward revision of the GDP (gross domestic product) growth between 150 basis points to 300 basis points is well understood, and should be manageable, in our view. However, a bigger risk could emerge if a nationwide lockdown hits India again," Gohil and Kamdar added.
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