Want to see why investors worry so much about the world’s emerging markets that they are taking money out of these stocks? Just take a gander at India.
In an effort to fight inflation the Reserve Bank of India has raised interest rates seven times in the last 12 months. So far the effort hasn’t slowed inflation—India’s wholesale price index, the Reserve Bank’s inflation measure, was up at an 8.43% annual rate in December. But it does look like the interest rate increases may have started to slow the economy. Industrial production in India climbed at an annual rate of just 1.6% in December. That’s a big drop from the 3.62% rate of growth in November.
And, with inflation still racing higher, Reserve Bank governor Duvvuri Subbarao has signaled the bank will keep raising rates, even though growth has slowed. The bank’s benchmark repurchase rate went up another 0.25 percentage points to 6.5% in January, a two-year high.
The effect on the Indian stock market has been exactly what you’d expect. With interest rates headed higher and growth slowing the Mumbai stock market was down 15% in 2011 as of February 10.
Economists have started to lower their forecasts for Indian GDP growth. For the fiscal year that ends in March 2011 the Indian economy is projected to show growth of 8.6%. Recent revisions from economists put growth for the fiscal year that will end in March 2012 at 7.7% to 8.1%. That’s not a huge drop—but investors fear that growth will be revised still lower.
That’s a real danger since the Reserve Bank is giving no indication that it sees victory in the battle against inflation or indeed any sign that inflation is moderating. Bank governor Subbarao recently raised his projections for inflation for the fiscal year that ends in March 2011 to 7% from his earlier estimate of 5.5%.
With those trends in place, it’s hard to make an argument for investing in India now. Which means cash flows out of the Indian market are likely to continue and prices are likely to erode further.
Investors can, of course, make exactly the same arguments for Brazil, Indonesia, Turkey, and China and other emerging stock markets.
Ambev has fallen 13.5% since 2011. Is this because of inflation fears in Brazil? If so why do you still hold the stock in Jubak’s Picks?
I’m getting nervous.
The way I see it raising interest rates to slow down inflation reminds me how they treat cancer. You have a regular series of Chemotherapy treatments that kills the cancer cells. Along the way the patient also slowly dies. Some people wonder if the agony is worth the treatment.
Nice seeing you Jim in Orlando!
With US interest rate around a quarter percent, it is advantageous for those here on H1Bs to put their earning in India banks for their 7%, investing in another country. Most US citizens don’t invest in foreign banks and would be putting their money in their local credit union or community bank fueling the American economy.
Thanks for your thoughts Jim, we really are in a two speed world
Can you shed some light on the recent exchange mergers?
In the USA when interest rates go up the market averages +2% after 6 months and +4% after 1 year so if you have stocks that pay a good dividend there seems to be no reason to sell.