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India Equity Research Reports, IPO and Stock News
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Indonesia & India: A reversal of fortunes?-------------------------------------------------------------
Much ado about inflation
● The following is a summary of our new Asian Economics report.
In it we consider the macroeconomic reasons behind the 15%
outperformance of Indonesia’s equity market relative to India this
year and, more importantly, whether it will continue.
● In our view, the news flow will remain far more helpful for
Indonesia than India over the next 3-4 months at least. In
particular, we expect Indonesian inflation to drop to 4.5% by
August (from more than 6% currently), while Indian WPI inflation
remains above 8% during the first half of the fiscal year.
● As such, Bank Indonesia is likely to remain on hold until
September/October, with the RBI hiking another 75 bp during the
same period. The lagged impact of earlier rate rises in India is
also likely to take an increasingly visible toll on economic growth
in the country to the surprise of many.
● By the end of 3Q, however, the situation should change
somewhat as Indonesian inflation starts to move higher again,
while the market senses the end of the rate rising cycle in India.
India and Indonesia may both be large, domestically orientatedeconomies but that hasn’t prevented their equity and bond markets
performing very differently this year. While Indonesia has once again
become flavour of the month, India has underperformed significantly.
We investigate what lies behind this and whether it will continue.
From our macroeconomic perspective, a lot can be put down to
their different inflation and policy interest rate dynamics. While
the key measure of Indian inflation has proved extremely sticky,
forcing the RBI to reassess the appropriate pace of tightening,
Indonesia has enjoyed precisely the opposite experience. This can
partly be attributed to the particular measure of inflation the central
banks focus on, but the full story is more complicated.
Over the next 3-4 months the macroeconomic news flow from
Indonesia is likely to remain positive. A combination of falling
headline inflation (probably to a low of about 4.5% in August), static
policy rates and robust growth should help support the country’s
equity and, to a lesser extent, bond market. We have revised down
our own year average inflation forecast significantly from 7.5% to
5.8%. Foreign portfolio inflows will remain robust and we don’t expect
to see the imposition of stringent capital controls from policy
authorities that are more concerned about the quality than the quantity
of funds entering the country. The main downside risk is a sizeable
increase in subsidised fuel prices.
We are not as optimistic about the Indian equity market during
the same period. Although our short-term inflation and interest rate
projections are similar to the consensus, we believe Indian economic
growth will not prove quite as ‘bullet proof’ as most anticipate. In our
view, real GDP will grow by a bottom-of-the-range 7.5% in both
2011/12 and 2012/13, as the aggressive interest rate tightening takes
its toll. Meanwhile, we have revised up our year average 2011/12 WPI
inflation forecast further to 8.0% from 7.6% previously.
Towards the end of 3Q this year, however, the situation may start
to change. At that time, we expect Indonesian headline inflation to be
moving higher again, with those that have priced out the possibility of
further rate hikes, having to price them back in again. This is unlikely
to be disastrous for Indonesian markets but will represent a change in
news flow for the worse.
In India, by contrast, markets should begin to sense the end of
the inflation and rate tightening cycle during calendar 3Q. With
growth softening as well by then the economic environment will be an
unambiguously positive one for government bonds – the only negative
being a higher-than-anticipated budget deficit. If investors have priced
in the full extent of the growth slowdown by the end of 3Q then
equities could also start to perform, although we suspect it might take
a little longer than that
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indonesia & India: A reversal of fortunes?-------------------------------------------------------------
Much ado about inflation
● The following is a summary of our new Asian Economics report.
In it we consider the macroeconomic reasons behind the 15%
outperformance of Indonesia’s equity market relative to India this
year and, more importantly, whether it will continue.
● In our view, the news flow will remain far more helpful for
Indonesia than India over the next 3-4 months at least. In
particular, we expect Indonesian inflation to drop to 4.5% by
August (from more than 6% currently), while Indian WPI inflation
remains above 8% during the first half of the fiscal year.
● As such, Bank Indonesia is likely to remain on hold until
September/October, with the RBI hiking another 75 bp during the
same period. The lagged impact of earlier rate rises in India is
also likely to take an increasingly visible toll on economic growth
in the country to the surprise of many.
● By the end of 3Q, however, the situation should change
somewhat as Indonesian inflation starts to move higher again,
while the market senses the end of the rate rising cycle in India.
India and Indonesia may both be large, domestically orientatedeconomies but that hasn’t prevented their equity and bond markets
performing very differently this year. While Indonesia has once again
become flavour of the month, India has underperformed significantly.
We investigate what lies behind this and whether it will continue.
From our macroeconomic perspective, a lot can be put down to
their different inflation and policy interest rate dynamics. While
the key measure of Indian inflation has proved extremely sticky,
forcing the RBI to reassess the appropriate pace of tightening,
Indonesia has enjoyed precisely the opposite experience. This can
partly be attributed to the particular measure of inflation the central
banks focus on, but the full story is more complicated.
Over the next 3-4 months the macroeconomic news flow from
Indonesia is likely to remain positive. A combination of falling
headline inflation (probably to a low of about 4.5% in August), static
policy rates and robust growth should help support the country’s
equity and, to a lesser extent, bond market. We have revised down
our own year average inflation forecast significantly from 7.5% to
5.8%. Foreign portfolio inflows will remain robust and we don’t expect
to see the imposition of stringent capital controls from policy
authorities that are more concerned about the quality than the quantity
of funds entering the country. The main downside risk is a sizeable
increase in subsidised fuel prices.
We are not as optimistic about the Indian equity market during
the same period. Although our short-term inflation and interest rate
projections are similar to the consensus, we believe Indian economic
growth will not prove quite as ‘bullet proof’ as most anticipate. In our
view, real GDP will grow by a bottom-of-the-range 7.5% in both
2011/12 and 2012/13, as the aggressive interest rate tightening takes
its toll. Meanwhile, we have revised up our year average 2011/12 WPI
inflation forecast further to 8.0% from 7.6% previously.
Towards the end of 3Q this year, however, the situation may start
to change. At that time, we expect Indonesian headline inflation to be
moving higher again, with those that have priced out the possibility of
further rate hikes, having to price them back in again. This is unlikely
to be disastrous for Indonesian markets but will represent a change in
news flow for the worse.
In India, by contrast, markets should begin to sense the end of
the inflation and rate tightening cycle during calendar 3Q. With
growth softening as well by then the economic environment will be an
unambiguously positive one for government bonds – the only negative
being a higher-than-anticipated budget deficit. If investors have priced
in the full extent of the growth slowdown by the end of 3Q then
equities could also start to perform, although we suspect it might take
a little longer than that
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