Indian stock market continues to surprise the investors across the world with its resilience. Last week was the first week of quarterly results for FY11. IT giant Infosys started the season with a disappointing set of numbers. With Infosys carrying over 10% weight in the benchmark, this performance did cap the upside on the broader markets. Its competitor TCS came up with a much stronger set of numbers. With the quarter on quarter volume growth in excess of 5% for both companies, the demand outlook seems to be holding up, for now. However, the most concerning aspect was the offshore pricing scenario especially for Infosys. This was the seventh straight quarter of decline in offshore pricing and it implies that IT firms are still price takers in the fiercely competitive market. The sector could, at best, be a market performer forms these levels.
Financials continue to surprise the market with their numbers. Axis bank came up with a sparkling performance with a 45% growth in net Interest income. Although the Net margins declined on a quarter on a quarter basis, they should stabilize around 3.7- 3.8 levels. The bank continues on a robust growth trajectory and remains a high conviction pick for all long only investors. HDFC net profit came in slightly below expectations at 23% above last year levels. Leap of Faith believes that the number to focus on is NII income growth which came in at 30%. It indicates the robust demand for credit in the system expecially for housing. The annual credit growth number should exceed RBI forecast of 20% and a big overweight on the Banking & Financials space should be maintained.
Moving to the topic of Inflation. There seems to be no respite from high food price inflation which has now seeped into manufacturing price inflation. With the June inflation number nearing 11%, RBi is left with no choice but to raise interest rates quickly. RBI is already looking behind the curve and serious questions are now being raised whether the independence of the institution has been compromised. With Governor SubbaRao finally speaking up against the finance ministry’s attempt to become a super regulator, it seems RBI might try to reassert itself. Let’s not forget that India has traditionally been a high inflation economy and panic driven aggressive rate hikes have derailed the growth story quite a few times. Therefore it is necessary that interest rates are raised regularly and gradually over the course of this year.
The IIP Numbers surprised on the negative with growth coming in at 11.5% against the consensus expectations of 16% . There was considerable slowdown in capital goods activity and consumer durables number. Leap of Faith would not read too much into the number as the capital goods numbers tend to be lumpy and fluctuate wildly between months. India should end the year with IIP growth in excess of 10%, stellar by even emerging market standards.
While Indian markets continue to be strong, Stock markets across the world continue to be weak. Concerns on European crisis and its ramifications on global growth remain. Growth seems to be slowing down in China. The growth for the quarter ending June came in at 10.3% slower than the 11.9% in last quarter. The Chinese government has been trying to slow down the Chinese economy for some time. It had pumped in huge stimulus into the economy during the height of the recession most of which found its way into the real estate sector. Chinese authorities imposed strict controls on the real estate sector in April this year making it difficult for investors and speculators to buy property. That seems to be working as the volume of real estate transactions has come down drastically compared to last year although prices have not fallen that much. The fall in Industrial metal prices by almost 30% from the peak of last year also indicates weak Chinese demand. The Shanghai composite index has fallen almost 40% from the peak achieved in August 2009 and is trading at 11 times one year forward earnings compared to 17 times for India!
The euro has rebounded sharply against the dollar with the current levels being close to 1.3 to a dollar. Leap of Faith believes that could be short-lived as European economy continues to flounder with economic growth forecasts looking grim. Pain in the Euro area economy continues to be the biggest risk to global asset markets and the stress test results of European banks coming next week need to be monitored very closely.
The result season has started in US. The picture looks mixed with JP Morgan and Google coming up with good results while Citibank disappointed. The consumer confidence number released yesterday came in far below expectations. The recovery in US is looking weaker by the day and there is a serious risk of a double dip recession. With the congressional elections due in November, Leap of Faith believes it is almost certain that President Obama will need to announce a new stimulus package soon. The direction of equity markets globally would largely depend on the size and contours of this stimulus package.
The time has come for people of
No comments:
Post a Comment