| |
When foreign institutions take stock again, Delhi could be a safe destination
K Seshadri
India is likely to be a preferred and safe destination for foreign institutional investors in the coming year. While this has partly aided the two-week rally on the stock markets, it is difficult to see the markets going below the 3247-level. On the other hand, January could very well trigger FII purchases once again.A major factor that will go in favour of India is the unenviable position of countries like Korea, Thailand and Malaysia. That these countries have already suffered due to erosion in the value of their currencies and of equity stocks is already well known. A reassessment in these markets would end up with the foreign investors having to relocate their funds at least to the tune of $ 70 billion, as explained below. Moody's has recently downgraded Korean, Thai and Indonesian government bonds a notch below investment grade. Malaysia's rating too was cut but not below investment grade. The downgrade will adversely impact a whopping $275 billion of debt in the region. South Korea, which has been
a strong attraction for investment has an international debt exposure of $116.8 billion as of June 30. The figure for Thailand is $98.9 billion and for Indonesia $60.6 billion. With the rating getting into speculative grade, there would be a pressure to salvage whatever values possible without suffering through the anxiety and uncertainty of the restructuring process. The violence of the adjustment process can be judged from the Korean 3-year bond yield which has soared to 31.5 per cent. Surely, part of the salvage from these debt funds, say around $75 billion would have to be re-allocated. India should have no problem, therefore in keeping up the rate of FDI flow at $ 2-3 billion per annum. Not only that, with an unusual affliction in the debt portfolio, fund managers could well convert part of it into selective equity investments. There's good news for India from the West too. A little more than 50 per cent of the equity funds are believed to be coming from the US investors. With the melt down in the
leading four south east Asian economies, the options for the US investors have narrowed down. Even within the US, there is perhaps a cause for booking one's profit rather than making more investment. The US stocks have been riding on the wave of a large bout of optimism, based on the performance of the economy in 1997. But it is becoming increasingly clear that this high growth rate cannot be sustained. The GDP grew at the rate of 4.9 per cent during the first quarter. However, estimates for further quarters were placed at 3.5 per cent. The country actually ended up with a growth rate of 3.1 per cent. The economy has slowed down closer to the long-term growth rate of 2-2.5 per cent. The US trade balance is also expected to post a $50 billion negative swing. There is more bad news for the US economy. The bursting of the economic bubble in the Asian tiger countries would inevitably lead to lower export growth prospects for the US industries. The Asian countries are undergoing a tight restructuring under IMF
directives. Growth in some economies are expected to be half of (or even nil) the previous year. This would directly affect US business, whether it be for its multinationals, exports or financial ventures. All this does not bode well for US stocks. Besides, there is a feeling that the US stocks are overvalued. The new philosophy of reassessing assets, which afflicted the Asian shores is bound to find its way to the US as well. Coupled with the not-so-bright outlook for overseas business, this could lead to a re-rating of US stocks. Stock prices can go down by 30 per cent. That is good news for India, because India would then become the attractive destination for US investors! However, some global fund managers are considering re-investing in the south east Asian stocks, which have moved southwards considerably. But, the turbulence in these economies would restrict investment choices. In contrast, India retains its gilt edge. The short-term foreign debt is only 4.3 per cent of total debt against 18.3 per
cent for developing countries. The short-term foreign debt is around $6 billion, compared to $30 billion for South Korea due by January 98. On current account too India has a score of minus $4.5 billion in contrast to S.Korea's minus $19 billion. The foreign reserves for India stands at $32 billion, with portfolio investments at $9 billion as of November, 1997. Though, December too has seen some portfolio funds flowing out, but on the whole this should not cause concern. In fact, the government has constituted a committee to investigate the outflow of FII funds and take remedial measures. The government, is unlikely to accede to the request to allow exchange cover for portfolio investments; and this could well be digested by FIIs, as compared to the injuries they sustained in Korea and elsewhere. The point is India is not really vulnerable. The only vulnerability is on account of the rupee parity. With a real exchange appreciation of 6 per cent, and a forward premium of 9 per cent, the rupee indeed can go
down by 7-10 per cent by end 1998. Thus, there is much reinforcement to the Indian stock markets by default of other developing economies and markets. Unfortunately though, the positives on the home ground leaves much to be desired. The growth story thus far this year is not very alluring. There is growth in power and mining sector; there is also an uptake in commercial credit. This gives some hope for industrial recovery. Yet the demand side picture for goods continue to be bleak.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
|
 |
