Fund managers face tough choices as year ends

After a splendid run through much of 2010 Indian shares are panting for breath in the final lap of the eventful year, and a recovery in world equities could pose a challenge to fund managers on where to put their money in the New Year.

The near 15 per cent rise in the top-30 Sensex this year was largely driven by foreign portfolio inflows of $28.6 billion (Dh104.9 billion) during the period, but with the year winding down there has been net outflows as money managers take some profit off the table.

The widely-tracked Sensex has come off 4.9 per cent since reaching within 100 points of a record high in early November, and foreign institutional investments have dropped from almost $30 billion.

"It's going to be a bumpy ride in the next few weeks," said Biju Dominic who advises retail investors in Mumbai. "Inflation is rearing its head and this increases the risk of higher borrowing costs which will be a big dampener for consumer spending."

India's $1.3 trillion economy has been riding on robust domestic demand thanks to a burgeoning middle class of more than 300 million people that have been buying houses, cars, consumer goods and luxury items as never before.

However, soaring prices of foodstuffs — onion prices have leapt seven-fold from around Rs10-Rs12 (Dh0.80 to Dh0.96) a kilogramme to as high as Rs80 in a span of two to three weeks — have begun to pinch the family budget in a big way.

Embroiled in a series of corruption scandals, Prime Minister Manmohan Singh's coalition in New Delhi was caught napping as the price spiral was caused by hoarding after unseasonal rains damaged some crop. The government woke up too late and the initial comments from Farm Minister Sharad Pawar only helped traders to keep prices high.

With world oil prices rising above $91 a barrel, India, which imports over 70 per cent of its crude requirement, is under pressure to raise heavily subsidized retail prices of diesel and cooking gas.

Fuel prices

A ministerial meeting is scheduled on December 30 to take a call on the fuel prices, and if the government decides to raise prices it could accelerate inflation pressures as all goods in India are transported in trucks or railway wagons that run on diesel. "The macro headwinds are formidable," said equity strategist Roshen Seth. "If the government does not raise fuel prices it would bloat the subsidy burden and state refiners will be saddled with huge revenue losses." Higher fuel prices, however, would light a fire under inflation and the Reserve Bank of India (RBI) would raise interest rates sooner than later.

The food price index jumped an annual 12.13 per cent in the week ended December 11 from 9.46 per cent the week before, while the fuel price index climbed to 10.74 per cent from 10.67 per cent. The RBI's next scheduled policy meeting is on January 25. India's economy is on course to clock a growth of nine per cent or more in 2010-11, but it may find it hard to maintain the pace in the following year unless the government aggressively push reforms such as opening up the retail sector and boost farming in the nation of more than 1.2 billion people.

And, if the belief that US equities can rise about a fifth in 2011 — it was Goldman Sachs's Jim O'Neil who said last week he expected so — gathers momentum there could be a slowdown in money flows to emerging markets such as India.

"It is fair to say that we are somewhat more concerned about flows into the emerging markets," Alok Sama, president and founder of Baer Capital Partners Ltd, told CNBC-TV18.

He said O'Neil's expectations were based on an optimistic return to normalcy in the US, but the jury was still out on this. For India, he was more cautious than a few months ago.

The Sensex rose 1.1 per cent last week to 20,073.66, still way off 21,108.64 hit on November 5. "For this rally to be sustained, you need to see some real evidence of Indian mutual funds, in particular, stepping in and participating in a major way," Sama said.