Worrying loan losses in India
The Indian stock market performed poorly in July, after showing clear signs of declining investor interest back in June. Economic growth is on a downward trend, albeit from a high level, and weaker growth coupled with overly high valuations of many companies is not a good combination.
The reporting season for India’s first quarter also had a negative impact on performance. Although many companies posted decent reports, the very cautious or even downbeat future guidance from a number of leading company managers led investors to batten down the hatches and adopt a more cautious stance.
Bajaj Finance, which issued a very strong report with profits up some 40 percent, warned that demand for credit to buy capital goods like motorcycles and air conditioning will grow at a slower pace in the future.
Several leading banks chose to increase their provisions for loan losses, and a relatively new trend is that consumer lending to households is now showing higher bad debt. This lending has been the growth engine for the private banks in recent years. Even though the fund has invested only in the best-run banks, this is still a concern since the banking sector makes up about 30 percent of the stock market.
During the first half of the year, it was mainly foreign capital driving the stock exchange, and now that international capital is reallocating and net selling India, the local institutions are trying to resist the downturn. As expected, the Fed cut US interest rates by 0.25 percent. The RBI followed suit with a cut of 0.35 percent and introduced easing to help financial companies. This is slightly positive.
IT service companies showed relatively strong order intake, especially in digitalisation. Domestic consumption and grocery companies are able to show more stable development and form a defensive part of the portfolio as the cyclical sectors fall back. Car sales are still showing a very weak trend month after month.
The biggest challenge for Modi’s government will be to accelerate growth.