India’s benchmark stock index, the third-worst performer in Asia this year, may be hurt the most among emerging-markets equities from global risk aversion because of a slowing economy and a weak rupee, according to Tata Asset Management Ltd.
“India’s in a difficult spot,” Venugopal Manghat, the Mumbai-based co-head of equities at the money manager, said in an interview yesterday. “Our macros are probably the worst or are worsening at a more worrying pace than any other economy in the emerging-markets space.” His Tata Balanced Fund has beaten 91 percent of its peers in the past three years, data compiled by Bloomberg show.
The rupee’s slump to a record last week has increased the cost of imported commodities, threatening to worsen the effects of Europe’s credit crisis and the record increases in funding costs on earnings. Profits for the 30 companies that form the BSE India Sensitive Index may grow 11 percent to 12 percent in the year to March 2013, less than about 17 percent forecast by analysts, said Manghat.
“Given the uncertainty on the currency front and the fact that globally things are not looking good, one has to factor in more earnings downgrades,” said Manghat, who manages about 35 billion rupees ($673 million).
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 Nov. 16 note. India may be the most-affected Asian economy if deleveraging in Europe turns “disorderly,” according to the note.
Europe’s debt crisis brought down governments in Greece and Italy, and erased about $4.7 trillion from global equity values this month. Funds investing in developing-nation stocks withdrew $2.7 billion in week ended Nov. 23, Citigroup Inc. said in a Nov. 25 report, citing EPFR Global data.
In India, overseas investors pulled out $842 million from equities last week, the biggest weekly outflow in six months, data from the regulator show. That sent the rupee to a record low of 52.73 on Nov. 22. The currency gained 0.6 percent to 51.965 yesterday, paring this year’s drop to 14 percent, the worst performance among Asian currencies.
“We could have further pressure from the global end, which means risk aversion could go up and currencies could depreciate further,” Manghat, 40, said.
The Reserve Bank of India, which has lifted interest rates 13 times since March 2010 to curb inflation that has exceeded 9 percent since December, last month cut its growth forecast to 7.6 percent from 8 percent. Morgan Stanley reduced its growth estimate for India to 7 percent for the year ending March 31 from 7.2 percent, according to an e-mailed report yesterday.
Forty percent of Sensex company earnings trailed estimates in September quarter, on top of a 47 percent lag in the three months ended June and 33 percent in March, Bloomberg data show. The stock index has sunk 22 percent this year, the third worst performer among Asian benchmark indexes. The loss has narrowed the valuation of its members to 14 times future profits, near the lowest in 2 1/2 years. The MSCI Emerging Markets Index trades at 9.9 times, according to data compiled by Bloomberg.
A weak rupee has lifted the cost of repaying foreign debt, Manghat said. Foreign convertible bonds of 25 of 28 companies in the BSE-500 Index may be redeemed when they mature by March 2013, causing an outflow of 330 billion rupees, Edelweiss Securities Ltd., a brokerage in Mumbai, said in a Nov. 23 note.
“Corporate India will get tested when a series of foreign currency bonds come up for redemption,” he said.
The Sensex fell 0.5 percent to 16,087.48 at 12:38 p.m. in Mumbai, and is set for its biggest monthly slide since January.
Shares of Indian consumer-goods producers, automakers and private lenders may fare better than the overall market in the next six months, said Manghat. The Tata Balanced Fund had 13.2 percent of its assets in consumer non-durable companies, 10.6 percent in banks and 6.8 percent in automakers at the end of October, the fund’s fact sheet shows.
“Consumption is a secular story and will be a big driver for the Indian economy,” he said. “India is significantly under-banked, significantly low in terms of penetration and private banks are more nimble, faster at decision-making, and are better structured to make good use of this opportunity.”
The fund has returned 26 percent annually for the past three years, data compiled by Bloomberg show.