Nomura View (Brief)

Market consensus has acknowledged that the Indian equity market was in need of a "healthy correction". While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. At the same time and apparently unbeknown to investors, the degree of financial leverage (open interest of derivatives) relative to equity market capitalisation has risen from five times to 20 times over the past 20 months, creating considerable systemic risk for investors in an economy with an open capital account. We feel investors are being betrayed by high earnings growth projections and macro risks are being ignored. Equally, the large issuance of equity by companies looks set to dampen ROE — normally a good indicator of a peaking in equity markets. We believe Indian equities have far further to correct compared to regional peers, and thus remain Bearish, with a lean towards Taiwan as an alternative.