Tuesday, January 02, 2007

Economic growth likely to slow down in year 2007

Monetary tightening may impact consumer spending

Penny MacRae

Four-year stock market bull run could stumble in 2007 amid expectations that the torrid growth pace of Indian economy will slow, analysts say. The 30-share Bombay Stock Exchange (BSE) Sensex index finished 2006 up a record 46.7% from the previous year, helped by a flood of foreign money attracted by strong corporate earnings and faith in India's growth prospects.

The toughest call is to time the coming correction but we believe it is likely to be sharp, said Morgan Stanley equity analyst Ridham Desai. Our base case is for an 18% decline in the BSE Sensex from current levels by the end of 2007, Desai said in a brokerage note. The Sensex rose by 42% in 2005, 13% in 2004 and 73% in 2003 and has shown an average annual return of over 43.5% over the last four years since the bull market started.

Indian share valuations now are looking somewhat stretched, making the market vulnerable to negative news, analysts say. The forward price earnings (P/E) ratio of the MSCI Asia-Pacific index, excluding Japan, stands at under 14 while India's forward P/E ratio is 20.2 which might make investors turn to cheaper markets, analysts say.

Overseas funds bought Indian equities worth $8.22 billion in 2006 against a record $10.7 billion the previous year. I would not expect very big returns next year, said R Balakrishnan, head of Mumbai-based Parallex Consultancy Services. In fact I would take a lot of my money off the table and wait for a good correction and then come back in.

Analysts still anticipate robust economic growth and sturdy corporate profits in 2007, although margins will be under pressure. But they forecast economic growth will slow from around 8.5% projected for the current fiscal year to about 7.5% or lower in the next financial year which starts in March 2007.

The economy will face less favourable external demand conditions and the growth momentum will also be impacted by the expected slowdown in the pace of credit expansion, said JP Morgan analyst Rajeev Malik. he lagged impact of monetary tightening and the central bank's measures to check the pace of lending to property sector will also impact consumer spending, Malik said.
The economy has grown by an average 8.1% annually in the last three years thanks to easy global liquidity conditions, a domestic bank lending frenzy and a surge in asset prices that have all contributed to the upbeat consumer, business and investor confidence, Malik said. More monetary tightening could come as early as January as the central bank seeks to check inflation.

Inflation is running at 5.43%, just shy of the upper end of the Reserve Bank of India's target band of 5.5%. Another factor that could hit shares is an expected flood of initial public offers as companies seek to take advantage of the markets rise.

Over 450 firms are looking to raise a total of $39 billion over the next three years according to figures compiled by Prime Database. This compares with just $5.35 billion raised in the primary markets in 2006. Amid the share market uncertainty, some fund managers are going overweight with defensive stocks such as consumer staples, technology, telecoms and energy and underweighting such sectors as industrial and financial stocks.

Deepak Lalwani, a director of the London-based Astaire and Partners, is looking at a range of 11,000 to 15,000 for the Sensex for next year.

"The lower figure should prove to be a support level on profit-taking and selling that may occur," he said. "The upper limit should prove to be a ceiling beyond which P/E valuations would be too rich for investors to chase share prices higher," he said. But "overall the positive view of the India growth story should continue," he added.

Source :