(Updates with Morgan Stanley comment in eighth paragraph.)
Nov. 17 (Bloomberg) -- Indian stocks, the worst performers among Asia’s biggest markets this year, may decline further as investors shun riskier assets amid the global economic turmoil, according to Franklin Templeton Investments.
“There is a possibility of a sharp correction over the short term,” K.N. Sivasubramanian, chief investment officer of Franklin Equity India, wrote in an e-mail dated Nov. 15. “Any spike in risk aversion could impact capital flows into India.” His Franklin India Flexi Cap Fund has beaten 72 percent of its peers over the past three years, according to Bloomberg data.
“Market direction will be influenced by earnings and policy newsflow along with global developments, especially Europe,” Sivasubramanian, 49, said. He did not provide a forecast for the Sensex.
The BSE India Sensitive Index, or Sensex, lost less than 0.1 percent to 16,773.22 at 11:11 a.m. in Mumbai. It fell as much as 0.7 percent earlier, a sixth day of losses. The gauge has lost 18.2 percent this year on concern the record increases borrowing costs may combine with Europe’s debt crisis to hurt profits. Earnings estimates may be cut as Asia’s third-largest economy slows, N. Krishnan, head of India research at CLSA Asia- Pacific Markets, said Nov. 14.
India’s central bank last month forecast the $1.7 trillion economy will expand 7.6 percent in the year to March 31, lower than the 8 percent it estimated previously, as tight monetary policy and Europe’s debt crisis cools consumer demand. It has raised borrowing costs 13 times since mid-March 2010 to tame inflation that has exceeded 9 percent since November last year.
Europe’s debt crisis brought down governments in Greece and Italy because of investor concern the nations will have trouble paying their debt. A worsening of the situation would constitute a “serious risk” to U.S. banks, Fitch Ratings said yesterday, stoking concern about the global financial system.
“I’d like to believe that a sudden crisis in Europe will not happen but we are very close to it,” Kaushik Basu, chief economic adviser to India’s finance ministry, said on Nov. 15. “I am very worried about Europe.”
A sharp rise in risk aversion could lead to a sell-off in riskier assets and ultimately large outflows from Asia, Morgan Stanley analyst Joachim Fels wrote in a note dated yesterday. India may be the most-affected economy in Asia if deleveraging in Europe turns “disorderly,” according to the note.
Twelve out of 30, or 40 percent, of the companies on the Sensex reported earnings that lagged behind analysts’ estimates for the September quarter, compared with 47 percent in the three months ended June, data compiled by Bloomberg show.
“Trends on top line and profitability were largely similar to last quarter, with revenues continuing to grow at a strong pace but margins being under pressure due to higher input and borrowing costs,” said Sivasubramanian.
The Flexi Cap fund last month bought more shares of ICICI Bank Ltd., the country’s largest private lender, and added to its holdings of Reliance Industries Ltd., the nation’s biggest company by value, and Wipro Ltd., the third-largest software exporter, according to fund-analysis provider Value Research.
The 19-billion rupee ($374 million) fund had 22 percent of its assets in financial companies on Oct. 31, followed by energy and technology stocks, according to Value Research. The fund has returned 27 percent annually in the past three years, according to Bloomberg data.
“Sectors that can piggyback on consumption and investment themes are good opportunities in the medium to long term, with growing incomes and urbanization,” Sivasubramanian said.
Franklin Templeton Asset Management had 362 billion rupees in Indian stocks and bonds on Sept. 30, Bloomberg data show.
The drop in the Sensex has narrowed the gauge’s valuation to 14.4 times estimated profits from 21.5 times in March 2010. The MSCI Emerging Markets Index trades at 10.3 times, according to Bloomberg data.
“Indian valuations are below long-term averages and look attractive vis-a-vis long-term fundamentals,” Sivasubramanian said. “We don’t see sovereign-debt concerns having any major impact on India, except in an indirect way due to changes in global risk appetite and the impact on capital flows.”
Overseas investors sold a net 3.77 billion rupees worth of Indian stocks on Nov. 15, paring their investments in equities this year to 33.6 billion rupees and ending 12 straight days of purchases, data from the market regulator show. Foreign funds were net sellers in January, February, May and August as higher interest costs weighed on company earnings and the government curbed its decision making amid corruption scandals.
Flows from abroad reached a record $29.4 billion in 2010 as the nation’s economic growth lured investors, lifting the Sensex 17 percent and making it the best performer among the world’s 10 biggest markets. While the International Monetary Fund in September cut its 2011 economic growth forecast for India to 7.8 percent from 8.2 percent, the pace is still the fastest after China among major Asian economies.
“While there have been outflows in 2011, the cumulative foreign institutional investors flow over the last five years have been $54.2 billion and their ownership of local stocks has risen,” said Sivasubramanian. “Given the economic and earnings growth potential, India will continue to be an attractive investment destination. In the short term, we may see fluctuations based on liquidity trends and risk appetite.”
Foreign funds have invested a net $88.7 billion in Indian stocks since they were allowed into the country in 1993, data from the regulator show. That’s about 8 percent of the nation’s $1.2 trillion stock market.
--Editors: Ravil Shirodkar, Darren Boey
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