By the early months of 2015, FII equity entries began to peter out as corporate earnings growth decayed. The last time corporate India produced such depressing results in terms of revenue and profit growth was during the 2008 financial crisis, the year in which the Sensex halved. When Raghuram Rajan took charge in RBI in September 2013, the Sensex hit 30000 points.
The first twelve months of this rally was largely driven by FIIs as they loaded up on India in the run-up to the 2014 General Elections and for a few months thereafter. However the Sensex could fall to 22000 points if the Indian rupee comes under pressure. In this first month of 2016, we can see the beginnings of a correction which is bringing back memories of 2008.
Since May 2015, FIIs have sold Indian equities worth Rs 50,600 crore whereas DIIs (driven by inflows into mutual funds) have bought Indian equities worth Rs 61,300 crore (this data is as of December 2015).
So now, why are FIIs losing their enthusiasm for Indian equities even as they enthusiastically invest in Indian debt?
Why are corporate earnings not growing quarter after quarter in a country where real GDP growth is 7%?
What does this signify for the Sensex?
The stressed banking system:
The Indian banking system is entering a very difficult phase as:
The quantity of stressed assets grows further from the current 13-14% (of system assets) in the wake of growing distress in the metals sector (10% of system assets), real estate (20% of system assets) and agriculture (10% of system assets).
The single dramatic fact about Indian macro in the last decade is that corporate fixed investment has dropped from 16% to 8% of GDP. This focuses our minds of creating an institutional environment that is conducive for firms to invest more.
Over the past year, the Chinese currency Yuan will devalue sharply in the coming years as the 40% revaluation on the yuan to the yen over the past five years has clearly tough China’s competitiveness.
This will create major issues for India which in all likelihood will trigger a 10-15% INR/$ devaluation.
China accounts for 20% of India’s non-oil imports and is the biggest importer into India. As the Indian currency slides, Indian corporates who have borrowed heavily abroad and in India are that much more likely to default on their obligations to Indian banks.
The real estate meltdown:
Real estate accounts for 10% of economic activity in India. Transaction volumes continue to be very low and new launches have all but dried up. Cement demand continues to be the weakest it has been in 20 years. Developers are increasingly struggling to repay banks and housing finance companies and developer defaults are becoming common place now.
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