Beware! All's not well with Indian stocks

The Indian stock markets may have gained significantly in recent months, but the country's fiscal position and uncertainty over global recovery still suggest a cautious approach towards equities, says Moody's .

Despite the surge in stock markets in the recent months, which has been met with jubilation by investors, some cautiousness still remains as the rally has come amid the continuing risks to both the global and India economy, research firm Moody's Economy.com said in report.

"With global recovery prospects uncertain, these are further reasons to be cautious about Indian equity prices," it said, adding "excess capacity, slowly recovering external demand and relatively high long-term interest rates will drag on investment".

The Indian economy is facing several challenges with an already-stretched fiscal position limiting the government's ability to provide further stimulus, while weighing on government bond prices.

Further, despite having a strong majority in Parliament, the government would need the political will to cut popular subsidies and modernise labour laws.

Although, India's downturn has bottomed and was mild compared with other countries but the stock market still tend to take their direction from the United States stock market movements, it added. "It is hard to envisage a sustained divergence in direction, even though emerging markets can amplify US trends," the report stated

According to research firm, with risk aversion rising in the US in recent days, it is questionable whether the stocks in the country (US) can continue to rise without significantly better economic data in coming months.

Moody's Economy.com said, "The major reason to question the strength of the recent rally is the state of the global economy."

The developed world is still in recession, relying on fiscal and monetary stimulus on a scale unseen since World War II, it said.

The Bombay Stock Exchange's benchmark index Sensex has gained nearly 50 per cent so far this year and over 83 per cent since March 9. The domestic stock markets have witnessed the inflow of over $5 billion so far in 2009 by foreign institutional investors.

Meanwhile, global investors have expressed confidence in the global recovery, with well over half of them expecting world economy to improve in the next 12 months, says a Merrill Lynch report.

The upturn in global investor sentiment has withstood the recent large sell-off in bonds and witnessed a 5 per cent increase compared to the previous month, according to the Merrill Lynch Survey of Fund Managers for June.

"A net 62 per cent of respondents believe that the world economy will improve in the next 12 months, an increase of 5 percentage points since May," the report stated.

It revealed that investors have expressed confidence in global economic recovery and broadly in the equity markets, despite fears that sell-off would damage sentiment.

For the first time since December 2007 a majority of the asset allocators responding to the survey are overweight on equities. Further, just 7 per cent of the panel believes the world would go through recession in the coming year, a steep fall from 38 per cent in May and 70 per cent in April.

"Investors are currently ruling out the prospect of the much-feared double-dip recession, and have shrugged off the weakness in bonds," Banc of America Securities-Merrill Lynch Chief Global Equity Strategist Michael Hartnett said.

While investors are finally overweight equities, risk appetite remains relatively constrained, the report added.
Investors are rewriting the rules for positioning their portfolios at the start of a new investment cycle and are basing their strategy around optimism over Chinese growth and emerging markets performance.

A total of 226 fund managers, managing a total of $620 billion, participated in the global survey from June 5 to June 11. A total of 184 managers, managing $362 billion, participated in the regional surveys.

Besides, energy is the sector attracting the biggest positive sectoral swing in allocations this month with a net 30 per cent of the fund managers overweight on energy stocks, up from a net 18 per cent in May, the report added.

Global emerging markets (GEM) remains by far the most popular destination globally for equity allocations well ahead of the US, which is the second-favourite location, the report added.