Forecast 2011: Nomura expects EMs to outperform; year of consolidation for India

Nomura says China will contribute three times as much as the US to global growth in 2011. India, the brokerage says, will contribute as much to global growth as Western Europe and Japan combined

Nomura, the global financial services firm, expects overall global GDP growth at 4.3% with developed market growth at 2.2% and emerging market growth at 6.6% in the new year. The US is expected to grow at 2.5%, with the best growth in Latin America expected Chile at 6.5%. The Asia Pacific region is expected to grow at 6.7%. Australia, New Zealand and Indonesia will see steady growth, while Japan, China, Hong Kong and India are expected to have moderate growth, whereas growth in Singapore, Thailand and Taiwan may fall sharply.

Nomura believes inflation in the developed world will be contained, but it expects the European Central Bank (ECB) and the Bank of England (BOE) to raise rates way ahead of the US Fed and the Bank of Japan (BOJ). Inflationary pressures will mount in emerging markets as funds keep flowing in and the authorities intervene to stem rising currencies.

In its report published recently, Nomura says India’s GDP growth should consolidate at 8% year-on-year in 2011, after a strong 8.8% in 2010 on account of three factors: (1) Agricultural output will normalise and growth will be lower due to base effects. (2) Growth in government consumption will slow. (3) Net exports will be a larger drag on growth as imports pick up in line with improving domestic private demand.

Nomura expects private consumption in India to remain strong, supported by rising wages and good rural demand. “We expect investment to be led by infrastructure, real estate and services sector capex.” The brokerage expects inflation to remain elevated (averaging 7.3% through 2011) due to a structural rise in commodity prices and a closing output gap that will result in greater demand-side inflation. Nomura also predicts that persistently higher than expected inflation will lead to up to 75 basis points of rate hikes from the RBI. “This will come on top of the aggressive 150bps of hikes in 2010 shifting the monetary policy stance to modestly tight.” 

“We judge the year 2011 to be a year of below-average returns for the market and set our December 2011 Sensex target at 22,100, implying a potential market return of around 12%. We expect some downside to consensus earnings growth expectations of approximately 20% year-on-year. At the same time, the policy environment will likely tighten more than expected, restricting premium expansion for equities,” says Nomura.

Inflation, consumer demand and labour shortages in India should be keenly watched, the brokerage suggests. A global rise in commodities could provide a huge spike to India’s inflation. The pick up in the investment cycle for 2010 has been disappointing, it says. “This has been because of a host of factors, including muted risk-taking ability on an aggregate basis, uncertainty in the macro environment, problems of resource shortages (difficulties in land acquisition and scarcity of labour) and policy hiccups in infrastructure areas, especially in telecom and roads. The recent slew of scandals and scams implicating the government will also likely impede the investment cycle.”

For Asia, rising inflation will be a big macro theme and it will be difficult to control if countries keep holding back appreciating exchange rates, Nomura says. For China it expects 9-10% growth in 2011-12 as the government implements structural policies to promote consumption, and in India supply constraints will keep inflationary pressures elevated, even as growth consolidates in 2011. Australia's GDP growth will lift sharply from mid-2011 on much stronger capex in the resource sector.

In fact, one key grouse Nomura seems to have with emerging market policymakers is that they are “prone to resist nominal exchange rate appreciation by stepping up foreign exchange intervention and imposing distortionary capital controls, with the result that over time the real exchange rate appreciation will likely end up occurring via domestic overheating and inflation.”  It worries that rising food and commodity prices create particular challenges for emerging economies given the importance of food in their CPI baskets. It votes for more flexible exchange rates that would also allow these economies to better absorb such price shocks. It warns that “the scope for inflation to overshoot on the upside in EMs is on the rise.”

Key overall global downside risks include an escalation in the euro area fiscal crisis, an investment pull-back in China, or the EM overheating turning sour, says Nomura. It expects the US dollar to consolidate against major currencies but weaken against EM currencies.

In China, Nomura expects government policies to focus on enforcing better working conditions, large minimum wage hikes and social welfare reform. Exports will grow at only 12%, low by Chinese standards, says the brokerage, but imports at 14% will be stronger due to strengthening domestic demand. China’s CRR is expected to rise to 20.5% in 2011 from 18% in 2010.

For the US, the brokerage sees a slow recovery process mainly because of several headwinds. It believes that reforms in the financial and healthcare sector could actually prove detrimental to hiring and therefore growth. While household debt still remains at excessive levels, household deleveraging will limit consumption. State and local government budgets are under pressure, housing recovery is still shrouded in uncertainty, and employment will improve but very slowly. Nomura believes the Fed’s $600 billion treasuries-buying programme will be enough to boost growth and stabilise inflation expectations. With the huge deficit looming large, fiscal policy will shift toward long-run reforms of taxes and entitlements.

For Europe, it believes there will be “gradual recovery in UK growth despite the dampening effect of deleveraging and fiscal consolidation. Inflation will likely stay above target during 2011 in the UK, and hover around the 2% target ceiling in the euro area. We expect no further QE with a first BOE rate hike in August 2011, the ECB’s in September 2011.” For the UK, Nomura is optimistic that the tailwinds of loose monetary policy and the persistent weakness of sterling will prove stronger than the headwinds of the fiscal consolidation programme, poor credit availability, a deterioration of real wages and a shaky housing market.  For the Euro area as a whole, consumer spending looks set to increase in 2011 and 2012, as labour market conditions improve and the unemployment rate starts to decline from early 2011.

Nomura expects the Japanese economy, which has hit a soft patch, to start recovering by mid-2011. It actually expects Japan’s CPI to turn positive by the end of 2012, marking Japan’s exit from its deflationary phase. “For the FY11 budget, deliberations are under way to reduce Japan’s corporate tax rate for the first time in about 12 years. We expect Japan’s central bank to implement additional monetary easing measures in response to a renewed upsurge of the yen, resulting in an increase in the asset purchase programme to ¥8–10trillion.”

For Russia, the recent severe drought and rising inflation will remain overhangs in 2011. However, there are things to look forward to. “The government accepts that the development of the economy is being hindered by the high level of state ownership, and has therefore announced a large privatisation programme for 2011-15, which should generate about $50 billion in revenue.” However, none of this will flow through in 2011. Another positive, Nomura points out, is that Russia has nearly ironed out all differences with the EU and US, and a possible entry into the World Trade Organisation in the second half of 2011 will be a positive.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author’s own and may not necessarily represent those of Moneylife.) 


Under-recoveries on diesel widen to Rs6.08 per litre

New Delhi State-owned oil firms have seen their losses on diesel sales widen to over Rs6 per litre, even as a ministerial panel meeting on raising prices has not yet been scheduled, reports PTI.

“The Empowered Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee was tentatively scheduled to meet at 1330 hours on 22nd December. But there is no communication so far on the meeting from the EGoM head (Mukherjee’s office),” an oil ministry official said.

A Rs2 per litre hike in diesel prices was on the agenda of the EGoM meet, with the objective of narrowing the difference between the domestic retail price of the transport fuel and the imported cost.

“The under-recovery or the revenue oil marketing companies lose on selling diesel, today stands at Rs6.08 per litre,” the official said.

Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation currently lose about Rs105 crore per day in revenues on selling diesel below the imported cost.

“International crude oil (raw material for diesel) has climbed to $90 per barrel, widening the gap between domestic retail prices and their imported cost,” he said.

Besides diesel, the oil firms currently lose Rs17.72 per litre on PDS kerosene sales and Rs272.19 per 14.2-kg LPG cylinder.

Even after last week's steep Rs2.94-Rs2.96 a litre hike, the retail price of petrol is Rs1.2-Rs1.25 a litre short of the imported cost.

The government had in June this year freed petrol prices, but state firms, which control 98% of the retail market, continue to informally consult the oil ministry before revising prices.

Also, the government had decided to make diesel price market-determined in stages. “Freeing diesel prices at current crude prices is simply not possible,” he said.

The three firms are projected to end the fiscal with a Rs68,361 crore revenue loss on account of the sale of diesel, domestic LPG and kerosene below cost.

“They are losing Rs215 crore per day on the sale of the three products. Also there are marginal under-recoveries on petrol,” the official said.

The official said the international price of crude oil—the raw material for making petrol and diesel—was hovering around $72-$74 per barrel in June when the government freed petrol prices. However, the price of petrol has risen five times since then, even as diesel rates remained unchanged.


Hindusthan National Glass signs deals worth Rs250 crore

Hindusthan National Glass & Industries Ltd (HNG) said it has signed deals worth over Rs250 crore with international companies which include Emhart Glass (Switzerland), Heye Glass (Germany), Pennekemp (Germany), Horn Glass (Germany) and Zippe (Germany).

These deals are part of HNG’s strategy to follow a very aggressive growth plan which would act as a catalyst in doubling its existing capacity in the next 30-35 months through greenfield and brownfield expansions entailing investment of Rs250 crore.

Emhart Glass, supplier of equipment, controls and parts to the glass container industry will be providing HNG with the latest glass bottle forming machines. It will also be supplying BIS machines to be installed for the first time in ASIA.

For the greenfield project in Naidupeta, HNG will put up the largest batch house to be supplied from ZIPPE and the furnace for container glass to be provided by HORN Glass.

On Monday, HNG gained 1.02% to Rs263 on the Bombay Stock Exchange, while the benchmark Sensex closed 0.12% up at 19,888.88 points.


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