DSIJ Mindshare

Where to invest in 2012

The year 2011 has been a rather forgettable year for equity investors for more than one reason. There was negative news all over the place. On the domestic front were issues like policy paralysis along with various scams, declining GDP growth rates, rampant inflation, rising interest rates, rising crude oil prices and the poor corporate results of India Inc. that impacted the markets in a depressing way. On the global front, the equity markets were in a tizzy. There was the Euro debt crisis, lacklustre growth in the US economy, worries over China’s growth sustenance and an overall feeling of gloom due to geo-political tensions in various pockets around the world.

The impact of all this has been clearly seen, and except Venezuela (which is an oil-based economy), which has seen significant gains, and a few other markets that have witnessed marginal gains, all the leading indices were in the negative zone for 2011. The story for India is not really different from all this. The barometer of India’s financial health, the Sensex, has witnessed a sharp decline of 22.60% on a year-to-date basis. What has added to the woes of the Indian investors is the sharp intraday volatility. Even the IPOs turned out to be value destroyers, where 26 out of the 38 companies that tapped the primary market were trading below their offer price, with losses in some scrips mounting to as much as 90%. Overall, it was a very tough year for investors to make money from the equity markets across the globe.

The scenario panned out exactly like what we had stated in our 2010 cover story. Last year, we had clearly pointed out that factors like rising inflation, interest rates and crude oil prices were expected to impact the earnings growth, and hence, had recommended that investors should keep their expectations low in 2011. In 2011, the WPI inflation remained above the 9% level for most of the time – which was quite a lot above the comfort level of the RBI. This resulted in the RBI increasing the key interest rates 13 times since March 2010. Even the crude oil prices remained on the higher side for most of the time.

Apart from these aforesaid factors, what added to the woes was the lack of movement in policy matters that the country suffered at the hands of a rather ineffectual UPA government, which failed miserably to bring in any kind of reforms. All this actually hit hard on the GDP growth front. Where at one time, India was expected to grow at more than 9%, the expectations were tamed down to as low as 7.50%. Now, it seems difficult to achieve even 7% growth. This slowing down of the rate of growth has already impacted the corporate results of India Inc. In the Sept 2011 quarter, the overall bottomline growth was just around 4%. Will the situation be any different in 2012?

“Although offering an interesting long-term growth story, the near-term analyst forecasts for earnings growth may see a downgrade in 2012”, says Karun Mutha, Senior Vice President and Head – Equity and Derivatives Advisory, HSBC InvestDirect. Another factor was the sharp depreciation in the rupee vis-a-vis the dollar. The rupee has declined by 19.70% against the dollar on a YTD basis, and has emerged as one of the weakest currencies. “India is one of the countries where the currency risk is higher than the average, with a high proportion of Indian equities/bonds held by foreign entities”, adds Mutha. [PAGE BREAK]

Even the global scenario was packed with pin pricks, with the Euro zone witnessing a major debt crisis. Worries emanating from there spread across the globe, and even FIIs, who are the backbone for the Indian markets, fled to safer destinations. The FIIs who put in a record Rs 133266 cr in FY10 are net sellers to the tune of Rs 2213 cr as of now. The poor domestic and global macro environment made it a rough terrain for equity investors. The repercussions of this were also seen on our portfolio of ‘Where To Invest In 2011’, which saw a decline of 23.23%.

While this is the situation till date, investors will be curious to know how we see the year 2012 panning out. Well, there doesn’t seem to be much hope on the horizon, and according to our reading of what lies ahead, the next year will be a challenging one. The Indian economy is slowing down, and even the government has lowered its target of growth in GDP to 7.50%. However, we are of the opinion that if the policy paralysis continues, it will be difficult to grow at even 6.5%. The latest IIP figure for the month of Oct 2011, which turned out to be a negative 5.10%, is an indicator of what lies ahead. Hence, strong action from the government on the policy and reforms front is the need of the hour. However, with 5 state elections coming up in 2012, the UPA is likely to behave in a populist manner, and does not seem to be in a position to go ahead with any big ticket changes.

On the global front too, the markets have hardly been impressed by the actions being taken by the EU at its various meets. So, the debt crisis may persist in 2012 also. Some of the leading economic indicators suggest that even the US economy is expected to grow at a slower pace. Inflation has begun to worry China, the fastest growing economy in the world, and you may see it cooling off to some extent. What we would like to indicate is that in 2008, the emerging economies like China and India helped the global GDP growth. But with these two also facing headwinds, the scenario does not seem to be improving soon.

Further, on the valuations front, the Indian market is looking pretty expensive. On a trailing four-quarter basis, the Sensex is trading at 17.20x. This is on a higher side, considering the slip earnings growth of India Inc. that has been witnessed of late. Therefore, caution is the buzzword.

Like every year, we have created a recommendations portfolio for our investors this year too. This portfolio has been put into shape by our research team by selecting the sectors that we are bullish on. We have recommended counters from such sectors as pharmaceuticals, infrastructure, auto ancillaries, FMCG, IT, banking and housing finance. On the company-specific front, stocks like Marico, HDFC Bank, TCS and Divi’s Labs have been included to provide stability. Scrips like Munjal Auto Industries, Gruh Finance and Marg will add the required zing factors to the portfolio.

Rs 10 Lakh Portfolio For 2012
Company Name CMP (07-Dec-2011) Quanity Amount (Rs)
Divi's Lab 753.6 185 139416
Gruh Finance 558 250 139500
HDFC Bank 463 395 182885
Marg  81.85 975 79804
Marico 147.3 1225 180443
Munjal Auto Industries 189 525 99225
TCS 1178 150 176700
Cash

2028
Total Value

1000000
Sensex 

16878

However, we do not expect the markets to recover in a hurry. Hence, rather than jumping in with all your fire power, it would be advisable to buy in a staggered manner. Before we conclude, the entire research and editorial team of Dalal Street Investment Journal wishes you a Happy and Prosperous New Year. May 2012 bring in loads of luck and fortune for all our readers!

DSIJ's picks for 2012

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