>Trade Winds (KARVY)

Five potential risks for our markets…
While India is witnessing a slowdown in GDP growth, in line with the global slowdown, it is still one of the fastest-rising economies in the world today. However, there are fi ve potential risks for the Indian stock markets:

A corporate de-growth in excess of expected 18-20%: The decline in corporate profits could be in excess of the currently factored 18-20% due to myriad factors like lower domestic consumer spending owing to lesser availability of consumer credit and sharp decline in demand in international markets, dampening exports, and tight controls on corporate expansion plans as well as corporate spending.

Fall in Sensex EPS beyond the expected EPS of around 850: If the risk of corporate profit de-growth results in the Sensex EPS coming below 850 in FY09, it can have an adverse impact on Indian stock markets. Moreover, the risk of negative growth is likely to trigger a lower P/E multiple for the index. All these could compound the risk for the Indian stock markets.

Increased flight of capital overseas: In the last few months, foreign institutional investors (FIIs) sold heavily on the Indian bourses, resulting in fl ight of capital overseas. FIIs turned net sellers to the tune of Rs9,117 crore in CY09. They sold in excess of Rs40,000 crore in FY08-09. The sharp depreciation of the Indian rupee against the US dollar and expectations of further weakness in the rupee against the US dollar also triggered the fl ight of capital overseas. The government’s burgeoning market borrowing program has also put pressure on the rupee. Thus, a further flight of foreign capital may pose increased risk for Indian markets.

Election results leading to a weak coalition government: The possible formation of a weak coalition government in India itself is a risk for the stock markets, particularly at a time when a strong and stable government is the need of the day to tackle the economic crisis. The competition between the two major camps—UPA and NDA—is likely to be compounded further with the formation of the Third Front.

Increase in terrorist activity in the sub-continent: Last but not least, the increasing terrorist activity in the Indian sub-continent is a risk for stock markets. The 26/11 terror attack on Mumbai, the recent terrorist strike on the Sri-Lankan cricketers, besides increasing political turmoil among our neighbors, raise India’s investment risk profile.

To see full report: TRADE WINDS