Markets at life time High

Indian Equity Strategy: Market at life time High

Indian equity markets made fresh life time highs on the back of improving domestic macros, supporting global equity and expected governance improvement in India after next general elections. Sensex crossed the level of 21,200 after a gap of almost six years. FII have been looking at Indian equities again with a lot of enthusiasm with more than 2.5 billion dollars invested in the month of October.

Global markets have turned supportive of equity. In their recent meeting, US Federal Reserve has expressed concern about the quality of macroeconomic recovery in US and has decided to maintain the current pace of bond buying program. This dovish stance from the Federal Reserve will help sustain upwards bias in Emerging market equities, currencies and bonds. The revival in global risk appetite has resulted in fresh FII inflows into emerging market equities with India turning out to be a big beneficiary. India has been one of the top performing equity markets since the middle of September when Federal Reserve first announced the postponement of tapering program.

Rise in Global Equities since 18^th September, 2013

The tough measures to ensure financial discipline in the peripheral eurozone area in the last few years have began to show results. European economies have seen rebound in growth with Spain recently coming out of recession. We expect this macroeconomic recovery in the Euro area to get stronger in the next few quarters.

RBI carried out the review of Indian monetary policy last week. As expected, it carried out a 25bps increase in repo rate along with a 25 bps cut in MSF. The corridor between repo and MSF has been restored to 100 basis points. The liquidity provided through term repos of 7-day and 14-day tenor has been increased from 0.25% of net demand and time liabilities (NDTL) of the banking system to 0.5% further easing short term liquidity. With these latest steps, the extraordinary measures taken by RBI in September to defend the rupee have been largely reversed. The trade data also reflects significant reduction in CAD and we believe that the worst is behind us on that front.

GDP growth in the last two quarters has remained below 5%. Capital formation growth in the country has further with no sign of pick-up as yet. The forecast for FY14 GDP growth has been cut from 5.5% to 5% by RBI  We believe that growth in the next two quarters will improve due to strengthening export growth and expected pick-up in agriculture. Also, revival of large stalled projects cleared by the Cabinet Committee on Investment will give a boost to capital formation activity. The worst seems to be behind us from a growth perspective and we believe we will see a multi-year revival of the growth and earnings cycle in next few quarters.

The political activity in the country is going to get more and more interesting as we approach the General elections scheduled in May. The recent opinion polls indicate support building up for Gujarat Chief Minister Narendra Modi led National Democratic Alliance (NDA). There have been several concerns about governance and populist schemes in the last few years and markets are getting excited about prospects of a better government emerging from the next election. We would expect a bigger rally building up going into the election.

While Sensex has made fresh life time highs, the performance of various sectors have been quite divergent. Pharma, IT and Auto have been best performers in the last six years, while Banking, Oil & Gas, Capital Goods and Metals have been worst performers. We expect this trend to start to reverse going forward. With the normalization of Repo MSF corridor, we believe RBI might pause in the immediate future. With monetary policy risk out of the way, we have turned positive on interest rate sensitive sectors like banks and automobiles. We expect export oriented sectors like IT to continue to benefit from the significant rupee depreciation seen this year. Telecom is another sector which might deliver strong earnings due to return of pricing power & reduction in competitive intensity.

We maintain our year-end Sensex target of 22,400. A good monsoon, strong export sector, continued monetary stimulus in US & a stable Euro area are significant positives for equity markets. With domestic macro-economic data also on the mend, we are aggressive buyers of Indian equity.

Indian Economy: Murphy’s Law at Work

Murphy’s law states that "Anything that can go wrong, will go wrong". This seems especially true in the context of Indian economy and Indian equity markets in the last one year. Last year this time, India was grappling with an imminent sovereign downgrade with an uncontrolled fiscal deficit, policy paralysis of the highest order with no economic reforms for eight long years and a weakening rupee. With Mr. Chidambaram coming back to the finance ministry, measures were announced to tackle the fiscal situation. We saw government spending being curtailed, FDI allowed in several sectors like Retail & Aviation and a more benign monetary policy.  Several policy measures were undertaken to cap fiscal deficit. The fuel price deregulation announce in January is probably the most significant reform measure in the last five years and will have significant positive long term impact on the economy. This combined with severe expenditure curtailment lead to a better than expected fiscal deficit number for FY13. With RBI easing monetary policy, it was expected that GDP growth will revive, although slowly, from the 5% levels of last year. And just when things seemed to be looking up, we had an 8% fall in rupee value through the month of May and June which changes the overall macro picture.

India is not alone in the currency carnage which was triggered, party, by US Federal Reserve’s comments on tapering on Quantitative easing. However, India is most vulnerable due to the high deficit levels on both fiscal and current account. RBI has been forced to intervene and carry out monetary tightening to defend the rupee. These monetary policy measures are going to slow down economic activity further and a recovery is now pushed back into 2014. We are now expecting a GDP growth of around 5% for the fiscal. Equity markets have reacted with banking and auto stocks taking a big hit. However, the broader market has been resilient with BSE Sensex with 5% of its all time high. We believe that all possible negatives which could happen have played out. One can add a fractured electoral outcome as another potential negative. However, no one is expecting very decisive mandate from elections next year so expectations are already low. There is not much that can go wrong from here. We have GDP growth, currency, Current account deficit, all at a decadal low. Things can only look up. Growth should get a boost once these temporary measures by RBI are withdrawn. We see more actions on the import side which will also help stabilize the rupee.

It’s difficult to see the sunshine when dark clouds gather. A good monsoon, commodity price correction, a strong macroeconomic recovery in US & a stable Euro area are significant positives for equity markets this year. We expect things to incrementally get better from here.

Spanish flu again

Bond yields are spiking up again. The biggest risk to risk-on trade which started in the beginning of the year is the coming back of eurozone crisis. Apart from higher bond yields in Spain & Portugal, market is also worried about out election outcome in France which could probably bring in the leftist Hollande in power undermining the very fragile fiscal pact between euro area countries. The Dutch government is split with the leadership finding it diffficult to push austerity measures within the colaition members

ECB has so far desisted from making fresh intervention in the bond market. However, the cries for another round of bond buying are getting stronger every day. US treasury secretary Geithner has already suggested ECB to get active in the market again. The macroeconomic data coming out of europe continues to disappoint with spain entering a recesssion in Q2 this year. Also, european manafacturing PMI continues to drop and shows no sign of settling down.


The stability of the global financial markets depends upon how quickly ECB intervenes.........

Looking beyond the budget

The rally which started in the beginning of the year has paused due to lack of positive trigger from the monetary policy. Although the core inflation continues to come down, Rbi has decided against the rate cut as of now. We expect RBI to initiate the first rate cut in its April policy and we expect a 75- 100 bps rate cut for the entire year.

The Budget, as usual, turned out to be a non-event for the market. Going forward the market will look forward to global cues and Q4FY12 results season for direction. We continue to maintain our positive view on Indian equity on the back monetary easing, global flows and a bounce back in GDP growth.

There are enough beaten down stocks in the midcap space which have the
potential to deliver returns superior to broader markets.

Game Changer: America's self-sufficiency in energy

America has done it again. While several experts continue to write about the coming decline of the American era,America has achieved a feat which very few emerging economies can hope to achieve: Energy Independence. With massive reserves of Natural gas and Shale gas, America will soon become a net exporter of gas. Ever since the oil shock of 1973, America has a declared goal to move towards energy independence which it is very very close to achieving. This means that America will become more aggressive in its policy towards Gulf and middle east states since it does not have anything to loose. Any escalation of conflict in Iran could lead to sharp rise in crude oil prices delivering massive economic shock to emerging economies like China and India while keeping America largely unaffected. India would be worst hit since its strategic oil reserves can meet only 15 days of demand in case of a supply disruption. hence India is trying very hard to strengthen its relationship with Iran. High crude oil price continue to be the biggest threat to Indian equity markets this year

The year of Central bankers

Super Mario has succeeded in calming the Global asset markets. By Undertaking to provide unlimited, very cheap liquidity to european banks, Mario Draghi has made sure there is enough appetite for junk euro government paper. This takes care of short term liquidity concerns for the euro area. US macro data provides further evidence to the fact that Ben bernanke has again turned around the US economy with several green shoots of recovery visible on the horizon.


In India, If Subbrao cuts CRR on 24th, i won't be surprised if there is a 5-10% further upmove...............he holds all the cards. In the absence of a functioning fiscal policy, the responsibility of reviving the economy and therefore the equity markets, lies completely with him

2012: The year of new Normals

We witnessed the second worst year for sensex since 1980. India also turned out to be the 2nd worst performing country in Asia Pacific Emerging markets in 2011s. This was a year when the resilience of the Indian economy got challenged by both internal and external factors.
However, bulk of the pain was self-inflicted. Correction in markets in the last quarter was more due to India Specific Issues like lack of policy measures, corruption and monetary tightening. GDP growth continues to come down. In foreign investors mind there was concerns about the mid-term direction this country is taking with increasing subsidies and populist measures.

We believe that going forward markets will reconcile to the fact that trend growth rate is coming down, and could settle at 6.5-7%. This could be the new normal for growth and is by global standards, not a bad number at all. We expect inflation would come down this year and could average around 7% leading to nominal growth of 13-14%. That would lead to corporate earnings growth of 15%.
Rupee has weakened significantly this wear and we expect 50 to be the new normal. Exporters will benefit big time from this rupee weakness.

We expect growth to bottom out in Q1 CY12 at 6%. Corporate earnings should also bottom out around this time. We expect RBI is to start easing monetary policy with a potential repo/rate action on 24th January itself. Going by history, equity markets bottom out around the time when interest rates peak out. We expect markets to bottom out in the Q1 itself.

Globally, things not as bad as perceived in August. In US, there is no double-dip. In Europe, Endgame will require ECB coming into play which we believe will happen sooner than later.
We Expect equity Market Returns of 20-25% backed by 10-15% earnings growth and a P/E rerating from 12 to 14-15 once growth bounces to 7%.