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Merrill
Lynch & Co. strategist Mark Matthews has a checklist for
investors in India and China.
If the
price of oil goes below $120 a barrel (from about $126
yesterday), if China’s annual inflation rate slows to 5
percent (from 7.1 percent last month) and if the US
banking crisis comes to an end, then the sagging
fortunes of equity markets in the two Asian countries
may reverse in relation to their better-performing
“BRIC” cousins Brazil and Russia.
At the
beginning of this year, Indian and Chinese stock
markets, taken together, were almost three times as
large as the combined value of shares traded in Brazil
and Russia.
Since
then, the gap has almost halved.
Brazil’s Bovespa Index, the world’s 10th-best-performing, has
risen more than 5 percent in US dollar terms this year,
while Russia’s Micex Index has declined 11 percent.
By
comparison, Indian and Chinese benchmarks have taken a
hammering, falling 36 percent and 42 percent,
respectively.
BRIC has
become “BRIC”: two disjointed halves.
With
runaway commodity prices, such an outcome was only to be
expected. After all, Brazil and Russia produce a lot of
the stuff that 2.3 billion people in India and China
guzzle.
By
contrast, Indian and Chinese energy and resource
producers have little exportable surplus and are forced
to satisfy domestic demand at less-than-remunerative
prices.
These
companies have, therefore, been nowhere as appealing to
investors as their counterparts in Brazil and Russia.
‘Good
bargains’
Templeton Asset Management Ltd.’s Mark Mobius said this
week that Indian and Chinese shares offer “good
bargains.”
On July
16, the average price-to-earnings multiple for India’s
key equity index fell below 13, making the underlying
stocks less than half as expensive as they were at the
start of the year. In the five trading sessions since
then, the benchmark has risen 19 percent, including a
6-percent gain yesterday.
The
Chinese index is valued at 21 times reported earnings,
the lowest in more than two years.
Still,
it’s hard to say with any degree of confidence if the
stock-market tide is about to turn in India and China.
“The
best we have is anecdotal talk of some investors being
worried about the crowding in energy, and others
sniffing around the edges of Asia,” Merrill Lynch’s
Matthews said yesterday in a report he wrote with his
colleague Daniel Casali.
“When
the stock markets of China and India start to outperform
those of Brazil and Russia, it could well be a sign the
environment is changing,” the Merrill analysts said.
Or
perhaps the environment will change.
Changing
environment?
Investors in India and China should be happy that the
political rhetoric and the policy environment in the
United States are becoming increasingly intolerant of
speculation that doesn’t suit that country’s short-term
economic interest.
The US
Securities and Exchange Commission last week banned
so-called naked short sales in shares of Fannie Mae,
Freddie Mac and 17 financial firms.
Meanwhile, from capping the number of contracts per
investor to making traders report their holdings,
lawmakers in Congress are considering as many as 15
proposals to pull oil prices down by legislative action.
Oil has
dropped 15 percent from a record $147.27 on July 11.
Metal
prices, too, are beginning to ease.
Cooling
commodity prices may well play a role in narrowing the
gap between stock-market performance in Brazil and
Russia on the one hand, and in India and China on the
other.
However,
equity investors in India and China have been spooked by
a surge in inflationary expectations that were left
unchecked for far too long by authorities in their blind
pursuit of growth. Policymakers will now have to
suppress inflation decisively to win back the confidence
of investors.
Some
amount of economic slowdown is already evident in both
India and China. Whether that’s enough to rein in
domestic price pressures still isn’t clear. |
