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.
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