India still under pressure
11/4/2011 4:22 PM Friday
President & CEO
Fullerton Securities & Wealth Advisors
Over the past couple of months, the Indian economy (in fact, all global economies without exception) has faced multiple headwinds due to various factors like the sovereign debt crisis in Europe, rising unemployment and political tensions in the developed world, domestic macro concerns, especially related to rising inflation in emerging markets, along with the balancing act between monetary tightening and finally, policy inertia. The global and domestic slowdown fears have resulted in dismal investor sentiment and the flight of capital, leading to a sharp 15 per cent correction in Indian markets over the last two months. Foreign Institutional Investors (FII) have pulled out around USD 2 billion from the equity markets during this period. To add to the woes, retail participation has dried up and the corpus available with domestic institutions in also limited.
On the earnings front, the first and the foremost thing that has come to light are the advance tax numbers for Q2 FY12, which are not encouraging. Sequentially, the growth in Q2 FY12 advance tax collection for the top 100 companies has almost halved to 9.9 per cent. A growth below 10 per cent indicates a weaker earning season ahead. If corporate growth starts faltering, we will witness significant downgrades, leading to a further weakening of the markets going forward. The other imminent issue is that of a potential Greek government default, which could drag markets down across the globe, though the impact will depend on various aspects of the default, as and when it transpires.
Inflation rose to a 13-month high in the month of August 2011, and is pretty close to being in double-digits. Going forward, inflation may cool to six-seven per cent by March 2012, on the back of a good monsoon and a high base effect, bringing it well within the RBI’s comfort zone. It does appear that we are at the top of the interest rate cycle, and as interest rates and inflation ease, we expect consumption-driven and rate-sensitive sectors to benefit. We are probably getting closer to the end of a rate hike. From the RBI’s point of view, commodities have come down globally, but against that, the rupee has depreciated. So, there has not been a great impact yet. Currently, the inflation figure is still looking closer to the 10 per cent mark.
The global economic situation continues to remain uncertain, with the debt crisis spreading to other economies of the European Union. Economic data from other parts of the globe, like the US and China, shows a worrying trend. We expect the pressure on the markets to continue until there is some resolution to the crisis, which may entail things getting worse, before they get better. In our view, some level of default by Greece is now a given. It is more an issue of the process of the default and how the EU manages the fallout.
Two positive outcomes that we see from the current scenario are the effects of an exceptional monsoon and a softening in global commodity prices, which should bring inflation down faster than expected. The valuations of quality scrips are below long-term averages in India. Long-term growth on the back of India’s demographic dividend and improving ROEs for quality listed companies will continue to drive growth. In the near-term, some decisive policy actions and progress on GST, Direct Tax, FDI in retail and insurance etc. will be the triggers.
The long-term growth story of the Indian markets is still intact, and corrections like these make the market attractive. Investors should use these dips as entry opportunities, given the valuations. Also, one should not try to time the markets, as it is very difficult to predict the lowest point with certainty.
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