Expected aversion to risk could trigger correction in stock market

Mumbai : The imminent aversion to risk following the Dubai government request to reschedule Dubai's debt could trigger a correction in Indian shares that have been driven by large portfolio investments by foreigners.

Even though the exposure of Indian companies to the Gulf business hub is negligible, the jittery global sentiment is bound to weigh down investors in the short term. For some fund managers, this will be a trigger to take profits in a market that has gained significantly this year.

"The picture is not very pretty," said equity trader Kevin D'Souza. "The fizz is gone; I bet people will be only too happy to take a break."

Foreigners have poured $15.4 billion (Dh56.6 billion) into Indian shares since the start of January, the second-biggest annual inflow since 2007, when such investment topped $17 billion. A robust recovery in India's $1.3 trillion economy has been the catalyst for the portfolio flows.

Economists expect the economy to expand upwards of six per cent in 2009-10, the fastest pace after China among major economies. Business confidence has been on the mend on the back of rising consumer spending, especially for big ticket items like cars and trucks.

The top-30 Sensex, which has more than doubled from its year low in March, posted its first weekly decline in four and dropped to 16,632.01 last week, its lowest close in more than two weeks.

The widely tracked benchmark pulled back from an almost four per cent plunge at one stage on Friday and pared losses to 1.3 per cent by close after the government and companies played down the Dubai imbroglio.

"India is a very large economy. I don't think some development in the real estate [market] in Dubai is going to impact the Indian economy," Trade Minister Anand Sharma told reporters in New Delhi.

Speaking in Hyderabad, Reserve Bank of India Governor D. Subbrao was more circumspect. "We must measure the extent of the problem there and how it might impact India," he said. "On Dubai alone, I want to say that we should not react to instant news like this."

Exposure

Larsen & Toubro Ltd, India's biggest engineering conglomerate, said receivables that were outstanding from Dubai were between $20 million and $25 million. Government-controlled Bank of Baroda, which has about 10 branches in the Gulf, said its exposure was barely seven-eight per cent of its total loan book in the United Arab Emirates.

"Based on available data, Bank of Baroda seems to have the biggest exposure to Dubai — this could cause the stock to come under some pressure in the near term," Morgan Stanley said.

DLF and Unitech, the country's two leading listed developers, said they had no projects in Dubai nor any funding from the emirate.

Still, Dubai's attempt to reschedule debt could spark a correction in emerging markets, compounded by Vietnam's currency devaluation and a flood of new share sales, investment guru Mark Mobius said.

"This may be the trigger to allow for the market to take a rest and pull back," Mobius, who overseas $25 billion as executive chairman at Templeton Asset Management, told Bloomberg Television. "A 20 per cent correction is not unusual in such a bull market, so that's quite possible and we should be ready for that."

Analysts said consumer goods companies, property developers, automakers and banks could feel the pinch if the Dubai debt issue escalates and causes job losses across the region.

About five million Indians work in the Gulf, mostly in the construction sector that is at the root of the current crisis. The money these workers send back home annually drives sales of products from washing machines to TVs and motorcycles, cars and houses. Banks also make money from the remittances and deposits.

India received $52 billion of remittances last year, according to the World Bank, making it the world's largest recipient of money from migrant workers. This includes cash inflows from the US, Europe, Asia and elsewhere. China got $49 billion.

Kerala, where remittances contribute about a fourth of its economy, will be the worst affected by the Dubai crisis.

The writer is a journalist based in India.