Investors play a waiting game as India battles corruption, inflation

A toxic combination of concern about Europe’s debt crisis and data illustrating a slower US economy could have set up India nicely as a safe haven for global investors. But with the money-losing memories of the financial crisis still fresh in their minds, global fund managers are having a tough time embracing volatile India which has been hit by inflation and a slew of recent corruption scandals that have stymied decision-making.

Although India’s growth story remains intact, the negative headlines have nourished anxieties that weak governance will undermine India’s success in the short-term. During May-June, India’s stock market corrected amid a challenging macroeconomic environment and volatility in foreign investment outflows. The Bombay Stock Exchange 100 Index declined by –2.56% in rupee terms, as Foreign Institutional Investment (FII) outflows jumped to $ 1.48 billion, the highest monthly outflow year-to-date.

The Reserve Bank of India (RBI) will on Thursday deliver its decision on monetary policy with the stock market timorous. Investors are worried the central bank will have to be more aggressive than is healthy to contain spiking inflation, which hit 9.1% in May. Technical analysts say the Sensex is now below its 50 and 200-day moving averages which is technically bearish.

“In my opinion, India has more reason to be concerned (about inflation). Here, I suspect it is the price of capital that is stuck at a relatively high level. There is no way to lower that price by inflating the economy, as in the case of Japan, because banks already have to offer high rates on deposits to convince customers to stay,” observed Robert J Horrocks, chief investment officer and portfolio manager, at Matthews International Capital, which has several Asia-focused funds as a part of its global quest for yield.

Horrocks says inflation in India is of “a more worrying kind” that suggests an insufficiency of supply of basic goods for the population. “It is an insufficiency that probably must be alleviated by thorough economic reform to make capital more available to those who will use it most efficiently to remove these (infrastructure) bottlenecks. As such, it is not an issue that can be quickly solved by some action of the central bank.”

It is hard to quantify the exact fallout from corruption, but it is noticeable that the Indian market didn’t touch fresh cyclical highs in May, as was the case for many developed markets. Bank of America Merrill Lynch said that overall, global asset allocators were overweight on emerging markets in May at a plus 29% but were underweight on India at minus 47%. Russia, China and Indonesia are still among the most favoured global emerging markets while Brazil remains firmly on middle ground.

“Do the corruption scandals spook savvy investors? Probably not, but investors have a choice. It is no longer just India versus China. According to the IMF, seven of the 10 fastest-growing countries in the next five years will be African. Brazil to a large extent has tackled its corruption problem and fixed its poor governance emerging as a very quickly growing nation, so fund managers and investors have an option to reallocate some of the capital they had initially allocated to India,” Krishna K Gupta, general partner in Massachusetts-headquartered Romulus Capital, told Firstpost.

“You are going to need to see more firms in India committing white money inside the country to show they are still confident about the state of affairs in India. As long as that happens, you will see FII inflows. India is too large to ignore,” added Gupta.

During the 2007-2008 financial Armageddon, emerging markets, including India attracted what some call ‘refugee capital’: capital that seeks a safe haven in times of economic and political uncertainty. With the US stock markets tanking to 11,897.27 on Wednesday, some Asian markets are again looking like more attractive destinations, but India remains fraught with risk.

“Corruption scandals will hurt how India is perceived but it is a minor short-term setback. It is inherently understood that in early stage growth markets there is corruption and volatility. It has become the stuff of reality TV in India. It is getting full-blown media coverage unlike the case in fellow BRIC member Russia. It is good, but also detrimental as it can be a turn-off,” Eric Mass, in Kotak Mahindra in New York, told Firstpost.
source-http://www.firstpost.com/business/investors-play-a-waiting-game-as-india-battles-corruption-inflation-26519.html?utm_source=MC_HOME

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