Indian Market Outperformance In 2012 Is Under Threat

Deepak Shenoy profile picture
Deepak Shenoy

Nearly every stock market around the globe has done well in 2012, with the DAX leading the western world pack at +17.3%, and the FTSE at the bottom with just +6.1% (YTD). (Also shown are China and India)

(Click charts to enlarge)

The Indian NSE Nifty Index did fairly well in comparison until the end of February, falling just below the Hang Seng and DAX. The Nifty was the worst performer of the lot in 2011, falling 24% in a year when every index fell. The US S&P 500 (SPY) has lagged world indexes after a 2011 that was flat and in a relative sense, an outperformer.

One of the reasons often mentioned for the fantastic 2012 showing is that liquidity is plentiful with Europe's central bank accepting just about anything as collateral and providing unlimited funding.

Among BRIC countries, though, Russia has done extremely well, going up over 24% in the first two months of the year.

What India has seen has been:

  • A rise in forex flows back into the country;a significant chunk of investor capital had exited in 2011 with the rupee falling over 20% against the dollar, but much of that fall has been reversed with the rupee rising nearly 12% in 2012.
  • Complete lack of government functioning, after multiple rounds of accusation of corruption and fraud in earlier actions. A few adverse court decisions have reversed earlier decisions, specifically in granting 2G spectrum to telecom companies that went on to raise large amount of money from foreign investors.
  • A very wide fiscal deficit due to slow tax growth and almost no progress on the selling of public company shares.
  • A huge current account deficit - mostly oil imports that have an import bill of $117 billion, and also significant purchases of gold (India is the world's largest customer).
  • GDP growth slowing to 6.09% in the quarter ended December 2011, the lowest since the two quarter dip below 6% after the financial crisis in 2008. (Chart)

Alongside, India has other issues that currently take the limelight:

  • Brent prices have crossed $125 (this is closest to India's import basket) which makes refiners pay more; but they can't raise prices-at-the-pump, since that is a political decision; and till now, the government subsidizes the "under-recovery" losses of the public sector refiners.
  • Inflation, Liquidity and interest rates: While headline inflation coming down under 7%, it's expected that the Reserve Bank of India will cut interest rates soon.
  • Inverted Yield curve: India's 10 year bonds are trading at yields of 8.2% while 91 day T-Bills have crossed 9%. The inversion is now very prominent, and rates for commercial paper have crossed 10% already.
  • The annual budget will presented on March 16, and it is quite likely that in light of a heavy fiscal deficit, the idea will be to raise more taxes and thus, curtail overall economic growth.
  • Elections - in many states, election results for state assemblies will be announced. If the currently ruling "Congress" is defeated badly enough, populist measures may emerge and eventually derail the reforms process.

Other BRIC countries look good in comparison, apart from the Shanghai Index. China is a much larger economy than India, and Brazil, and Russia, are strong in commodities. India's internal problems continue to plague it. The momentum of strong inflows in 2012 and the lack of a deep crisis in Europe have kept Indian stocks flying, but to sustain it for the rest of the year (and indeed the next decade) the NSE Nifty will need more than pure luck.

Disclosure: I am short the Nifty index through options in Indian markets

This article was written by

Deepak Shenoy profile picture
Co-founder, Capital Mind Capital Mind is the source for information on Indian markets, macroeconomics and trading analysis. In our premium subscription we provide detailed research on stocks, bonds and derivatives apart from deep analysis of the Indian economy.

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