| Summary of Contents MARKET OUTLOOK Winds of change Key points -
Signs of hope: As articulated in our last issue of the ValueGuide, titled "Darkest before Dawn'', we had pointed towards some potential positive developments on the domestic and global fronts that could provide some relief or hope for the equity markets. In the domestic scenario, the likely peaking of interest rates and the expected pause in policy rate hikes boosted market sentiment. On the global front, European leaders are finally taking some hard decisions and planning radical steps to address the issue of sovereign debt crisis engulfing the European fringe countries. The risk of a double-dip recession in the USA too has eased out. -
Domestically, RBI to take a pause in the interest rate hikes: After raising the key policy rates by 375 basis points since March 2010, the Reserve Bank of India (RBI) has indicated a pause in the policy rate hikes on account of the rising concerns over the domestic growth. Further, the inflation rate, which has been the main concern of the RBI, is expected to trend down due to the slowing of growth and a favourable base effect. While we do not expect any immediate reversal of the rate hikes, equity markets have led a reversal in interest rate cycle historically. However, the risk to the easing out of inflation emerges from the persistently high food inflation (despite record agriculture output); commodity prices are also volatile. -
Globally, finally some hard decisions in Europe; economic data in USA to remain mixed: The European Union is moving towards implementing a comprehensive rescue plan in Europe, broadly focusing on three points (larger European Financial Stability Facility [EFSF] of $1.4 trillion, recapitalisation of banks and a 50% haircut on Greek debt by lenders). Though the situation remains fluid and volatile, we take comfort from the fact that the yields are already factoring in the worst scenario of Greece's sovereign default. In the USA also, the gross domestic product (GDP) growth in Q3 was tepid but better than expected and hence the risk of a double-dip recession has lowered unless the situation in Europe worsens considerably. -
But concerns galore; key risks global contagion and rising probability of rating downgrade of India: In addition to a potential global event risk, the deterioration in the government's financial health poses the risk of the fiscal deficit overshooting the target of 4.6% set for FY2012 and is a threat to India's rating. Moreover, the lower than expected growth in revenues and higher subsidy burden could result in the crowding out of private investments and corporate earnings. -
Valuations supportive; policy reforms in winter session and inflation the key monitorables: As we had pointed out in our earlier strategy reports, the Indian economy has been facing mid-cycle blues that have been accentuated by global issues and policy paralysis at home. Though there are concerns galore, the valuations have turned supportive since we turned extremely cautious early this year. The Sensex trades at 13.8x one-year forward earnings as against the long-term average multiple of 15.0-15.5x now. Thus, we believe that the easing of macro concerns and some positive developments on the reforms front in the winter session of the Parliament could provide the required boost to the market and lead to relatively better market conditions by the end of the calendar year 2011. | |
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