India Equity market outlook - April 2010
Transcript of India Equity market outlook - April 2010
-
8/9/2019 India Equity market outlook - April 2010
1/43
BRICS Securities Ltd
19 April 2010
In these matters, the only certaintyis that nothing is certain.
~ Pliny the Elder
When one admits that nothing iscertain one must, I think, also admit
that some things are much morenearly certain than others.
~ Bertrand Russell
Not to be absolutely certain is,
I think, one of the essentialthings in rationality.
~ Bertrand Russell
\
http://www.finestquotes.com/author_quotes-author-Pliny%20the%20Elder-page-0.htm -
8/9/2019 India Equity market outlook - April 2010
2/43
BRICS Securities Ltd
GLOBAL We argue that surge in global equity and debt markets in the last one year is not reflective of equally strong
economic recovery. The markets have run ahead of fundamentals
Key unsolved issues include high sovereign debt in large parts of Europe, Japan, and the USA a potential US problem of commercial real estate defaults leading to a policy of Extend and Pretend
Global excess liquidity is reducing markets demand more for debt
Nearterm debt requirements of several sovereign borrowers is so high that the probability of at least one
major sovereign default over next 6-12 months cannot be ruled out. This can lead to significant drying up ofrisk capital
INDIA Demand in the Indian economy appears exceptionally robust
However, going forward, consensus bets are dependent on increasing commodity profits and higher bankprofitability. Both are possibly subject to adverse shocks
Policy is perverse in several cases with food inflation being a function of government determined prices Agriculture credit growth figures hide more than they reveal With valuations nudging the top end of trading range, market has to become a bubble for it to go further
IN CONCLUSION India remains dependent on foreign capital to sustain growth and the equity markets Our base case assumes that there will be a gradual but definite tightening of fund availability leading to
market correction with a 10% downside Timing is uncertain, but cannot be too far in the future
The bull case in the absence of liquidity tightening can be 19%
-
8/9/2019 India Equity market outlook - April 2010
3/43
Cheers!
-
8/9/2019 India Equity market outlook - April 2010
4/43
BRICS Securities Ltd
0
20
40
60
80
100
120
140
1-Apr-08
22-Apr-08
13-May-08
3-Jun-08
24-Jun-08
15-Jul-08
5-Aug-08
26-Aug-08
16-Sep-08
7-Oct-08
28-Oct-08
18-Nov-08
9-Dec-08
30-Dec-08
20-Jan-09
10-Feb-09
3-Mar-09
24-Mar-09
14-Apr-09
5-May-09
26-May-09
16-Jun-09
7-Jul-09
28-Jul-09
18-Aug-09
8-Sep-09
29-Sep-09
20-Oct-09
10-Nov-09
1-Dec-09
22-Dec-09
12-Jan-10
2-Feb-10
23-Feb-10
16-Mar-10
Equity Market Indices
MSCI INDIA MSCI EM ASIA MSCI EMU MSCI EM EUROPE MSCI NORTH AMERICA MSCI WORLD
-
8/9/2019 India Equity market outlook - April 2010
5/43
BRICS Securities Ltd
VIX HIGH COMPLACENCYCURRENT 18, PREVIOUS YEAR 50
TED NO FEAR OF DEFAULTSCURRENT 13, PREVIOUS YEAR 110
-
8/9/2019 India Equity market outlook - April 2010
6/43
BRICS Securities Ltd
YIELD ON 10-YR US TREASURYUP FROM 2.7% TO 3.9%
BAA TREASURY SPREAD 250BPS
-
8/9/2019 India Equity market outlook - April 2010
7/43BRICS Securities Ltd
DOLLAR INDEX 82 AND RISING,PREVIOUS YEAR 86 AND FALLING
CRUDE OIL $80,PREVIOUS YEAR $50
-
8/9/2019 India Equity market outlook - April 2010
8/43
Bounce from the bottom, not out of the woods
-
8/9/2019 India Equity market outlook - April 2010
9/43BRICS Securities Ltd
GLOBAL OUTPUT6% BELOW PREVIOUS PEAK
WORLD TRADE8% BELOW PREVIOUS PEAK
Source : ORourke & Eichengreen
http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421 -
8/9/2019 India Equity market outlook - April 2010
10/43BRICS Securities Ltd
-
8/9/2019 India Equity market outlook - April 2010
11/43
BRICS Securities Ltd
RETAIL SALES HAVE RECOVEREDCAR SALES ARE WEAK BUT HIGHERTHAN PREVIOUS YEAR
-
8/9/2019 India Equity market outlook - April 2010
12/43
BRICS Securities Ltd
WORST DROP IN EMPLOYMENT INLAST 10 RECESSIONS
SLOWEST RECOVERY THUS FAR
-7
-6
-5
-4
-3
-2
-1
0
19
48
1953
1957
19
60
19
69
1973
19
80
1981
19
90
2001
2007
Largestdecline
froms
tartofrecession(%)
Year recession started
Change in US Employment Recessions
-2
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Changefrom
startofrecovery(%)
Months from start of recovery
Change in US Employment Recovery
1948 1969
1980 1981
1990 2001
2007*
-
8/9/2019 India Equity market outlook - April 2010
13/43
BRICS Securities Ltd
HOUSING STARTS NO RECOVERYCONSUMER LOANS STILLDELEVERAGING
-
8/9/2019 India Equity market outlook - April 2010
14/43
BRICS Securities Ltd
CHANGE IN US MONEY SUPPLY POSITIVE BUT LOW
MONEY SUPPLY SHRINKING INMOST PARTS OF THE DEVELOPEDWORLD
-
8/9/2019 India Equity market outlook - April 2010
15/43
BRICS Securities Ltd
-
8/9/2019 India Equity market outlook - April 2010
16/43
BRICS Securities Ltd
Sentiment The VIX [volatility index] was 50, not 18
Interest rates The yield on the 10-year Treasury note was 2.7%, not 3.9% Baa spreads were 580bps and tightening, not 250bps
Macro The US federal deficit was $450 billion, not $1.4 trillion Oil was at $50/bbl, not $80/bbl The DXY [US dollar index] was at 86 and depreciating, not 82 and
appreciating
Valuations The market was 20% cheap as per Shiller P/E ratio, not 25%
overvalued
-
8/9/2019 India Equity market outlook - April 2010
17/43
Correction is difficult to time, but certain
-
8/9/2019 India Equity market outlook - April 2010
18/43
BRICS Securities Ltd
DELEVERAGING IS NEEDEDDEPENDENCE ON EXTERNAL
SOURCES CAN INCREASE COSTS
-
8/9/2019 India Equity market outlook - April 2010
19/43
BRICS Securities Ltd
-
8/9/2019 India Equity market outlook - April 2010
20/43
BRICS Securities Ltd
WITH INTEREST RATES OF 1.3%,JAPAN STILL PAYS OUT ALMOST 14%OF ITS REVENUE AS INTEREST
SAVINGS RATES HAVE BEENFALLING. AN AGEING POPULATIONWILL EVENTUALLY LEAD TO HIGHERINTEREST RATES
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Japan Net Govt Interest Payment as % of Total Revenue
0
2
4
6
8
10
12
14
16
Jan-00
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Japan Household Savings Ratio
-
8/9/2019 India Equity market outlook - April 2010
21/43
BRICS Securities Ltd
CDS MARKET DOES NOT THINK SO NOR DOES THE BOND MARKET
-
8/9/2019 India Equity market outlook - April 2010
22/43
BRICS Securities Ltd
0
10
20
30
40
50
60
70
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
PIIGS Bonds Due (bn euro)
-
8/9/2019 India Equity market outlook - April 2010
23/43
BRICS Securities Ltd
Bank Exposure to Commercial Real Estate, CMBS, and CDS (as of 9/30/09) (US$ mn)
Commercial Banks(classified by assetsize)
Total AssetsTotal CREWhole LoanExposure
TotalCMBSExposure
NotionalAmount ofCreditDerivatives
Notional Amountof CreditDerivatives(Guarantor)
Tier 1 Risk-basedCapital
CRE WholeLoans/Tier1 Capital
CMBS/Tier 1Capital
CDS/ Tier1 Capital
$10 billion
(85 banks)9,460,306 842,794 47,304 12,985,697 6,273,213 749,303 112.50% 6.30% 1,733.00%
$1 billion to $10billion (440 banks)
1,158,908 364,533 1,943 60 31 104,897 347.50% 1.90% 0.10%
$100 million to $1billion (3,798 banks)
1,104,244 353,651 708 132 24 102,542 344.90% 0.70% 0.10%
-
8/9/2019 India Equity market outlook - April 2010
24/43
BRICS Securities Ltd
Equity markets are assuming that central banks willsort things out. This is unlikely
High government debt and high fiscal deficits leave littlespace for policy action without sacrificing growth
Commodity prices are reflecting return of the globalconsumer when global growth forecast remain muted
In this scenario, India appears to be a relative high-growth island
-
8/9/2019 India Equity market outlook - April 2010
25/43
Is all well?
-
8/9/2019 India Equity market outlook - April 2010
26/43
BRICS Securities Ltd
BRICSMulti-factor
MarketModel
MacroFactors
FundFlows
Valuations&
Earnings
InterestRates
We model the market as acomposite of several factors,some of which may beoverlapping, but are largely
orthogonal Our model assumes that changes
in indicator levels are moreimportant than the levelsthemselves
Different factors may havevarying importance at differentpoints of time. However, when allindicators are up or down, thechance of a definite marketdirectional move increases
-
8/9/2019 India Equity market outlook - April 2010
27/43
Positive aggregate demand environment; fiscal deficit will likely rise
beyond budget estimates
-
8/9/2019 India Equity market outlook - April 2010
28/43
BRICS Securities Ltd
Cement prices are stable despite significant capacityadditions
Steel companies are operating at full capacity
Auto companies are finding it difficult to cater todemand
Roads order flow has exceeded plan for previous year
IT hiring is back
-
8/9/2019 India Equity market outlook - April 2010
29/43
BRICS Securities Ltd
HIGHEST EVER COMMISSIONING OFNEW PROJECTS IN FY11E
BASIC INDUSTRIES ARE ADDINGCAPACITIES
0
1000
2000
3000
4000
5000
6000
7000
2008 2009 2010E 2011E
Investment commissioning (Rs bn)
Industry FY10 FY11 E
Cement 16.10% 18.80%
Steel 5.80% 15.90%
Primary Aluminium 28.60% 67.80%
Electricity Generation 7.80% 14.60%
Change in outstanding capacity
-
8/9/2019 India Equity market outlook - April 2010
30/43
BRICS Securities Ltd
Government fiscal deficit is dependent on Ability to raise money from disinvestment which depends, in turn, on state
of the market Oil price remaining at or around $80 per barrel its already higher No additional social sector spending current indications are that this may
have to increase draft food security bill is a case in point Fund flows
Emerging markets have received more-than-proportionate share ofinvestment flows as evidenced by the relative stock market performance
India remains a preferred destination and is one of the best performingemerging markets
Domestic fund managers are holding approximately 6% cash one of thelowest levels in recent times
Supply of paper from both government and private sources is significant.Government alone has announced a $9bn divestment program. This should beseen in the context of average portfolio inflow of foreign investment of $20bn
-
8/9/2019 India Equity market outlook - April 2010
31/43
Headed upwards
-
8/9/2019 India Equity market outlook - April 2010
32/43
BRICS Securities Ltd
We argue that almost 43% of inflation is driven by policy factors food andenergy
Consequently, the ability of the RBI to keep inflation in check through interestrate signaling has limited utility. RBI will, however, still be expected to go throughthe motions, and raise policy rates
Base Case
As inflation becomes more wide-spread we expect RBI policy rates to rise RBIs ability to raise policy rates will be somewhat constrained by slow/low rise in
international interest rates since, without resorting to quantitative restrictions, RBI will notbe able to constrain Rupee appreciation if the interest rate arbitrage between dollar/euro/yenand the rupee becomes even higher than it is
Higher interest rates, along with rising prices, will eventually hurt demand though the Indianconsumer is currently underleveraged and therefore has the ability to sustain demand even inthe face of higher interest rates
Infrastructure expenditure will be hit worse than consumer demand in the face of risinginterest rates
Bull Case The most benign scenario is that interest rates remain at or around 100bps of current levels,
while inflation eases off because of a combination of base effect, and fresh capacity addition,and global interest rates rise to reduce arbitrage between domestic and international rates
-
8/9/2019 India Equity market outlook - April 2010
33/43
BRICS Securities Ltd
INFLATION CAGR OF 6.5% OVER 10YEARS
MINIMUM RISE IN GOVERNMENTSET MINIMUM SUPPORT PRICE 6%
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10P
Components of Inflation
Wholesale Manufactured Agricultural
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10P
Components of Inflation
Wholesale Manufactured Agricultural
Agri Commodity 1999-2000 2009-2010 Growth % CAGR %
Moong 1,105 2,760 250 15
Sugarcane 56.1 129.84 231 13
Urad 1,105 2,520 228 13
Arhar 1,105 2,300 208 11
Maize 415 840 202 10
Paddy Common 490 950 194 9
Sunflower 1,155 2,215 192 9
Wheat 580 1,100 190 9
Paddy Grade 'A' 520 980 188 9
Jute (TD-5) 750 1,375 183 8
Groundnut 1,155 2,100 182 8
Soyabean Black 755 1,350 179 8
Barley 430 750 174 7
Gram 1,015 1,760 173 7
Cotton H-4 1,775 3,000 169 7
Rapeseed/mustard 1,100 1,830 166 7
Soyabean Yellow 845 1,390 164 6
Cotton F-414/H-777 1,575 2,500 159 6
Safflower 1,100 1,680 153 5
Source: CMIE Source: CMIE
Rise in MSP over last 10 years (Rs/unit)
-
8/9/2019 India Equity market outlook - April 2010
34/43
BRICS Securities Ltd
INFLATION IN AGRI PRICESOUTSHINES THAT OFMANUFACTURED GOODS
AGRI CREDIT IS WAY AHEAD OFPRODUCTION (REAL) HIDINGNPAs?
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Agricultural Credit and Output
Agri Credit Agri Prod
90.0
92.0
94.0
96.0
98.0
100.0
102.0
104.0
106.0
108.0
110.0
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10P
Index of Agri prices/Mfg Prod
-
8/9/2019 India Equity market outlook - April 2010
35/43
Pushing the upper end of historical range
-
8/9/2019 India Equity market outlook - April 2010
36/43
BRICS Securities Ltd
0
5,000
10,000
15,000
20,000
25,000
30,000
Mar-93
Sep-93
Mar-94
Sep-94
Mar-95
Sep-95
Mar-96
Sep-96
Mar-97
Sep-97
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
12m fwd PE (x)
Price 7x 10x 18x 26x 15x
-
8/9/2019 India Equity market outlook - April 2010
37/43
BRICS Securities Ltd
10
12
14
16
18
20
22
24
26
28
30
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Sensex Rolling Avg PE
5yr Rolling Avg PE 10yr Rolling Avg PE
-
8/9/2019 India Equity market outlook - April 2010
38/43
BRICS Securities Ltd
FROTHINESS IS EVIDENTONLY FEW SECTORS HAVE NOTMOVED
8.8
7.2
6.8
6.5
5.5
4.94.9
4.8
4.3
4.1
3.5
3.3
3.1
3.1
2.3
1.6
0.9
0.3
0 2 4 6 8 10
Telecom
Hotel
Pharma
Banking
Oil & Gas
Sensex IndexConstruction
Retail
Metals
Engineering
Cement
Real Estate
Media
Power
FMCG
Auto
IT-Services
Misc
1M Sector Perf (%)
11.6
10.1
8.7
7.9
7.5
5.34.0
3.3
3.1
2.3
0.9
0.9
(0.0)
(0.2)
(1.3)(3.2)
(3.5)
(9.6)
(15) (10) (5) 0 5 10 15
Retail
Media
Pharma
Engineering
Banking
CementAuto
IT-Services
Misc
Hotel
Construction
FMCG
Metals
Sensex Index
TelecomOil & Gas
Power
Real Estate
3M Sector Perf (%)
-
8/9/2019 India Equity market outlook - April 2010
39/43
BRICS Securities Ltd
886
1,046
6
1.1 3
2.6
26.0
11.6 1
0.1
6.5
0.2
4.8 1
.8 1.1 0
.53.4
800
850
900
950
1000
1050
1100
Mar-10
Metal
Banks
Oil&Gas IT
Engg
Auto
Power
FMCG
Realty
Pharma
Telecom
Cement
Mar-11
Sensex (FF adj.) EPS Contribution by Sector
-
8/9/2019 India Equity market outlook - April 2010
40/43
BRICS Securities Ltd
Rs 1,046 for Sensex (FY11) is Bloomberg consensus estimate
Estimates sensitive to commodity prices China will play the determining role. Aslowdown in China can adversely affect commodity prices
Global metal demand remains subdued Alcoa reports revenue slowdown, whileArcelor Mittal has significant unused capacity
Higher interest rates with low credit growth will constrain banks ability to re-price loans while deposit rates may move up to compensate for higher rates
Oil & Gas company profits are dependent on being able to pass on crude priceincreases to consumers. Already, crude prices are higher than when the last priceincrease was allowed
For earning forecasts to increase all these factors need to turn positive not onthe horizon at this time
-
8/9/2019 India Equity market outlook - April 2010
41/43
BRICS Securities Ltd
Earnings and Valuations Earnings estimates => bullish consensus adverse movement in commodity
prices can reduce estimates Valuations already pushing upper end of the band higher levels require
bubble formation
Interest rates flat or higher (greater probability) => lower valuation
Money flow Emerging markets have done well. Incremental flows may be positive Governments disinvestment plan will provide large stock supply Domestic institutional investors fully invested
Macro Fiscal deficit budget estimates likely to be significantly overshot Incremental capital requirements will rise as investment in infrastructure rises
increasing dependence on world economic environment
-
8/9/2019 India Equity market outlook - April 2010
42/43
BRICS Securities Ltd
Bull case (20,900 Sensex, 20x FY11E) International macro situation improves or stabilises without significant outflow from
emerging markets including India Trade down providers of liquidity will derive higher returns
Base case (15,700 18,750 Sensex, 15x FY11E, FY12E)
International situation worsens, but in stages, allowing money managers time to adjust Benchmark large part of portfolio, while betting on continued consumer demand thedomestic consumer is again unleveraged. Lighten up on high investment sectors
Bear Case (12,500 Sensex, 12x FY11E) International situation worsens sharply especially with a sell-off in commodities Raise cash levels to maximum permissible. Stay largely benchmarked
YearConsensus
Sensex EPSBase Case Bear Case Bull Case
FY11E 1,046 15,690 12,552 20,920
FY12E 1,250 18,750 15,000 25,000
Source: Bloomberg
Base case: 10% downside in Sensex
-
8/9/2019 India Equity market outlook - April 2010
43/43
Disclaimer: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time ofpublication, but we make no representation as to its accuracy or completeness. All information is for private use of the person to whom it isprovided without any liability whatsoever on the part of BRICS Securities, any associated company, or employee thereof. Nothing containedherein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well asrise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or
Head Office: Sadhana House, 1st Floor, 570, P. B. Marg, Behind Mahindra Tower, Worli, Mumbai - 400 018 . Tel: (91-22) 6636 0000