With India gradually losing its foreign institutional support amid concerns over the second wave of covid infections, the slow pace of vaccination and a sharp rise in inflation, fund managers should be selective and cautious. While Asia surpassed the United States and Europe at the start of the pandemic until 2020, the situation has turned around this year. Vaccination rates are lagging far behind in developed markets in most emerging markets, while India is experiencing the worst increase in covidy cases and deaths.
“Asian or emerging market (EM) equities have significantly underperformed their global peers over the past six months and some of the valuation surplus has eased. We are therefore now shifting an equal weighting (rating) on emerging market equities relative to DM (developed markets) equities as a whole, with Europe being the strategy team’s most preferred global equity region ”, Morgan Stanley analysts said.
According to the global brokerage firm, short-term risks for Asia and emerging markets remain high, including covid vaccination and variant dynamics, diminishing policy stimulus, regulation of the internet industry in China and round-trip demand for IT equipment from last year. “Fund flows to Asia / emerging countries have become neutral and seasonality is not attractive for the coming months,” he added.
Ridham Desai, analyst at Morgan Stanley, said India is a stock picking market. “The cross-asset and sentiment indicators are neutral on equities. The challenge for equities comes from falling liquidity and supporting valuation. “
So far this year, the MSCI World Index, which represents the performance of large and mid-cap stocks across 23 developed markets, has risen 9.41%, overtaking MSCI Emerging Markets, which has only risen by 3%.
But India has remained somewhat resilient with its benchmark, the Sensex, which has gained around 6% (in dollars) so far this year. The aggregate market capitalization of all BSE-listed companies hit a record high of $ 3 trillion on Friday. Indian stocks lost nearly $ 2 billion worth of foreign institutional investor (FII) money in April and May after continuing to flow since October.
Pratik Gupta, managing director and co-director of Kotak Institutional Equities, said that in the short term, the risk will come from the delay in the widely expected ramp-up of vaccination, or if vaccines prove ineffective in preventing the third wave of the disease. virus. “A more fundamental longer-term risk could come from a faster-than-expected rise in global and domestic interest rates, impacting all emerging markets, including India. Other risks to keep in mind are a rural slowdown (due to the impact of the virus) which could worsen if the monsoons disappoint, a spike in global oil prices and any populist government action ahead of the elections in the United States. ‘UP (Uttar Pradesh) next year,’ Gupta added.
One of the main concerns of Indian fund managers, while allocating money to stocks, is that rising commodity prices can lead to inflationary pressures. According to a BofA Securities survey of fund managers, released last week, 35% of respondents said inflation could be the biggest tail risk for their portfolios. A record 69% of respondents expect a scenario of high growth and high inflation.
“If inflation is skyrocketing around the world and the Indian rupee is under pressure, we might see some IFIs selling; we are monitoring these risks, ”said Jitendra Gohil, head of equity research India, and Premal Kamdar, equity research analyst, Credit Suisse Wealth Management, in a May 18. report. inflation are major risks for Indian stocks.
A downward revision of GDP (gross domestic product) growth between 150 basis points and 300 basis points is well understood and should be manageable, in our opinion. However, a greater risk could emerge if a national lockdown hits India again, ”Gohil and Kamdar added.
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