| Summary of Contents
| MARKET OUTLOOK 2012: A year of high volatility
Also an opportunity to cherry pick quality stocks -
2011-the year of self-inflicted pain: Circa January 2011, the year began with a lot of hope. The global situation was expected to improve with the unleashing of the second round of quantitative easing (QE2) by the USA while at home the government was expected to push forward some of the long awaited reforms and rein in the fiscal deficit. Domestic demand was robust and corporate earnings were expected to grow at compounded annual growth rate (CAGR) of 18-20% over FY2011-13. However, contrary to expectations, India's economic growth moderated sharply in 2011. The Indian currency and the country's stock market were among the worst performers globally. Unfortunately, much of the pain was self-inflicted: the domestic macro-economic environment deteriorated sharply due to continued monetary tightening by the central bank and a lack of resolute policy response from the government even in the face of tough global conditions. -
2012-begins on an extremely pessimistic note: Pessimism is written all over. Globally, the economic revival in the USA remains sluggish and the euro zone is on the edge threatening to slip off the cliff. At home, the political logjam has derailed policy decisions and there is no shortage of macro-economic problems. The consensus earnings estimates for FY2012/FY2013 have been revised downwards by 9-10% over the last one year and the CAGR growth estimate for FY2011-13 now stands at 11.5%. What's more, the earnings downgrade cycle is likely to continue on account of the signs of moderation in domestic demand, margin pressure and rising foreign exchange (forex) losses. The emerging markets are underperforming and the Indian equity is out of favour among foreign investors. The retail investor is disillusioned and the proportion of domestic savings flowing into equities is the lowest in a decade. -
Rate cuts and resolute policy actions are key triggers for a meaningful revival: Global events would continue to strongly influence foreign inflows and consequently the overall market direction. However, any meaningful revival in the equity market would have to be supported by a reversal in policy rates and resolute government policy actions. The cut in policy rates is inevitable now though the timing of the same has become uncertain due to the stubbornly high core inflation. The situation has been amplified by imported inflationary pressures led by the rupee's depreciation. The more questionable issue is the ability of the ruling United Progressive Alliance (UPA) government to circumvent political logjam and push forward reforms in the areas of pension, land acquisition and retail foreign direction investment (FDI) instead of tilting towards populist schemes like food security bill and farm loan waiver. -
Downside risk remains despite supportive valuations: After the correction, the Sensex now trades at 12.0-12.5x FY2013E earnings or at a 26% discount to the mean of the last five years' valuations and at a 17% discount to the mean of the last ten years' valuations. The Sensex' premium over the other Asian peers has also shrunk to 17% compared with the historical average of 25%. But the downside risk remains high due to the rising risk aversion globally that is visible in the record net outflows from the emerging market equity funds this year. Moreover, regulatory uncertainties and policy inaction have created critical issues in some of the index heavyweight sectors/stocks such as banks, infrastructure, power, telecommunications (telecom) and Reliance Industries. Nevertheless, many quality stocks are trading close to their 2009 lows and 2012 could very well turn out to be one of the best years to cherry pick quality stocks for exponential returns over the next few years. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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