Green shoots, from afar

Last Updated: Mon, Dec 10, 2012 03:51 hrs

pEconomic growth continues to trend downwards and trends in corporate earnings have not been encouraging either For the first time in three years core revenues for India&rsquos top companies grew by single digits in the quarter ended September 2012 Yet the stock market is buoyant giving out a distinctly different signal The biggest factor pushing the markets up is that foreign institutional investors FIIs continue to buy Indian equities by the bagful During the year so far FIIs have invested nearly 21 billion about Rs 114 lakh crore and many foreign brokerages have revised their growth estimates for India upwards for the next year Most feel the central bank will cut rates soon which should help and that consumption will remain resilient helping anchor demand Stock markets are never the best indicators of the real economy but they do provide vital clues about future business conditions A consensus seems to be emerging among market experts that either the Indian economy has bottomed out or it is in the process of reaching there Experts also say it makes sense for deep-pocketed long-term investors to lock in their money at lower valuations and reap gains when things really turn goodppThe other factor working in favour of the equity market is the growth differential between India and the developed world India&rsquos growth is still above five per cent and no one expects the economy to stagnate or contract as has been the case in many parts of Europe and the emerging world Most importantly corporate earnings continue to grow albeit at a slower pace than in the past This translates into ever rising earnings per share EPS which calls in turn for higher stock prices assuming that the price-to-earnings multiple remains unchanged The depreciation of the rupee has further turned the risk-to-reward ratio in favour of India Some foreign investors believe that the dollar is overvalued while the rupee has been beaten down way too much and they are investing in rupee-denominated assets to gain from any appreciationppThis buoyancy won&rsquot last unless the economy&rsquos engines start firing The ball is thus squarely in the government&rsquos court Its attempt to protect consumers from higher commodity prices in the international markets is unsustainable &mdash and domestic investors know it The United Progressive Alliance has diverted public expenditure from economically productive projects to subsidies adding little to the country&rsquos production capacity Meanwhile higher purchasing power in the hands of consumers without a matching investment in the country&rsquos agricultural and industrial production capacity resulted in inflation Persistently higher consumer inflation also eroded households&rsquo savings thus lowering the rate of capital accumulation in the economy All this has resulted in lower effective demand for goods and services in the economy and companies across sectors now report lower capacity utilisation than in the past For India Inc the asset turnover ratio &ndash net sales divided by net assets &ndash declined to 18 during the 12 months ended September this year from a high of 22 in 2006-07 Given this companies are better off improving their capacity utilisation not investing The markets have done their bit it&rsquos over to the governmentp

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