$1.3tr economy seeks to lure more investors into equities

Dubai: A rapidly growing economy is set to lure more investors into Indian equities, with the outlook for manufacturing and services brightening on stronger spending and helped by a global recovery.

India's $1.3 trillion (Dh4.7 trillion) economy, Asia's third-largest after Japan and China, expanded 7.9 per cent in the September quarter, the fastest pace in 18 months.

The data, released on Monday, bettered market expectations by a wide margin and indicated government stimulus measures were bearing fruit.

Reserve Bank of India Deputy Governor Usha Thorat said the expansion rode on the strength of government spending, which rose 27 per cent last quarter.
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Spending by consumers and companies increased 5.6 per cent while investments in plant and machinery gained two per cent in the quarter, she said.

"We are revising up our GDP growth forecast for financial year 2010 [April to March]... taking into account upside surprises in agriculture and industrial output and emerging signs of a recovery in the services sectors," said Sonal Varma, economist at Nomura, raising to seven per cent from six per cent predicted earlier.

Acceleration

Thorat also said the central bank would likely revise upwards its forecast from six per cent when it reviews monetary policy on January 29.

Goldman Sachs analysts Tushar Poddar and Pranjul Bhandari predicted India's growth to reach 8.2 per cent in 2010-11 and further to 8.7 per cent in the following year.

"After two years of below-trend growth, in part due to the global financial crisis, India's economy, in our view, is set to accelerate again," the analysts said in a note. "India's potential growth is rising, driven by reforms in infrastructure, fiscal, and financial sectors."

The top-30 Sensex, which rose 2.8 per cent last week to 17,101.54, should also get a boost from the November US jobs data, which showed the smallest loss since the recession began in December two years ago.

With a dip in the jobless rate the improving labour situation will help foster a US recovery, boost consumer confidence and should bolster the outlook for Indian outsourcers like Tata Consultancy Services, Infosys Technologies and Wipro Ltd in their main market.

"The risk-reward ratio for investors is clearly tilting in favour of reward," equity trader Anmol Dalal said. "I'm advising clients to build their portfolio now before a full-blown recovery sets markets on fire."

Citing historical returns, securities firm Macquarie said India and Singapore offered Asia's best chance for a December rally while Indonesia may post the strongest gain.

"In terms of countries, Indonesia gives by far the strongest monthly return in December," analysts Daniel McCormack and Henry Hon wrote in a report. "But if, on the other hand, you want to maximise your chances of a positive return for the month then you should build positions on India and Singapore."

Indian and Singapore shares have advanced in December 87.5 per cent and 80 per cent of the time, the analysts said. Indonesia has yielded an average 7.9 per cent during the last month of the year, the most among 10 Asian markets, they said.

‘Overweight'

Credit Suisse upgraded non-Japan Asia to 20 per cent "overweight" from 15 per cent "overweight" and said it expected world equity markets would post a return of 12 per cent by mid-2010, supported in part by better-than-expected growth and a nearly 30 per cent increase in corporate earnings.

"We believe that the first half of 2010 will continue to be positive for equities," the brokerage said. It forecast an index level of 350 for the MSCI AC World in mid-2010, up from 314 currently.

Credit Suisse predicted global gross domestic product may grow by 4.1 per cent next year, core inflation would likely remain muted and monetary policy would remain loose.

For Indian equities, the risk comes from rising inflation, mainly spurred by prices of food items that struck an 11-year high in November.

"The persistence of high food-price inflation has a tendency to spread to manufacturing inflation," said C. Rangarajan, the prime minister's chief economic adviser.

 The writer is a journalist based in India.