By MOHAMMED HADI and HARSH JOSHI, February 01, 2011
Egypt was home to the world's worst-performing stock market in January. Any guesses about the second-worst?
It was India. Suffering its worst decline since October 2008, the MSCI India Index dropped 13% during the month as investors refocused their attention on inflation and an inevitable rise in domestic interest rates. It fell another 1.4% Tuesday.
That drop has brought Indian stock valuations closer to where they should be. The MSCI index now trades at 15 times forecast 2011 earnings, compared to an average over the past decade of 14.1 times, data from Citi Investment Research show.
This alone isn't enough to entice fund managers back in. "India is getting cheaper", says Khiem Do at Baring Asset Management in Hong Kong, "but it's not a bargain." Anyway, global investors may have had their fill: India drew in 46% of the $64 billion in foreign funds that poured into Asia's emerging markets in 2010, more than double its weight in the MSCI benchmark, Credit Suisse says.
Where things head now could depend on how well Indian companies protect their profit margins against rising commodity prices. The rise hasn't hit profits yet on a wide scale, but that could be because of existing inventories and forward contracts. In fact, a rise in commodity prices usually turns up in results with a lag of two-quarters, CLSA says, so just how much damage $92 per barrel crude oil, and $8.4 per bushel wheat will do, won't be evident until earnings are reported in July.
Typically, the most affected are automobile makers and consumer-goods companies that are vulnerable not only to higher input costs but also the waning buying power of consumers. For example, Kotak Institutional Equities predicts earnings of the 14 consumer-goods companies it covers will decline by 5% to 25% in the year through March 2012, thanks to high prices of raw materials like palm oil and saw dust - a key ingredient in mosquito repellent.
More broadly, however, analyst forecasts have yet to reflect this kind of concern. As of Friday, Citi's data show, stock analysts were forecasting profit growth of 18.6% for the Sensex in the year ending March 2012, down only slightly from forecasts earlier in the month and still well above growth rates expected just a few months ago. As brokers finally relent because they decide commodity prices won't give back gains, or as companies begin to issue warnings of their own, stock prices could fall further.
Last year, India basked in the attention it received from the world's stock investors. This year promises a serious test of its appeal.
Write to Mohammed Hadi at email@example.com and Harsh Joshi at firstname.lastname@example.org