Performance of Indian Stock Market (1)

8/13/2019 Performance of Indian Stock Market (1)

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Performance of Indian Stock Market during 2011

After a smart post-2008 crisis recovery in the equity market over 2009 and2010, when the Indian equity market went up 81% in 2009 and 18% in 2010,

2011 was a disappointment. While global factors such as the European crisisand slow recovery in the US were the main triggers, inflation in India as well asdelay in government policy-making were the main reasons behind Indiasdisappointing year on the stock market. The benchmark Sensex index fellaround 23% since the beginning of the year.

That markets were in distress is reflected by volatility. On at least 30 occasions,

the Nifty of the National Stock Exchange moved at least 100 points in a single

day, a daily move of about 2%. While foreign institutional investors (FII) stayed

away for most of the first half of the year because prevailing valuations didntenthuse them, they continued to stay away even in the second half when

markets fell by 10%. Simply put, FIIs found Indian equities risky.

Global and domestic factors weighed down markets

FII net flow into the Indian equity markets for the first six months of 2011 was

$0.5 billion (R2,636 crore) compared with $4.66 billion for the same period in

2010; in the next five months FIIs were net sellers (they sold more than they

invested) to the tune of nearly $1 billion. We have failed to deepen the equitymarkets, said Vivek Mahajan, head (research), Aditya Birla Money. We dont

have large domestic long-term funds to counter FII outflow and hence markets

have suffered.

Indias inflation was the biggest worry from the start of the year and the

Wholesale Price Index remained consistently above 9% throughout 2011

touching a high of 9.78% in August. To counter rising inflation, the Reserve

Bank of India (RBI) raised interest rates six times by a total of 225 basis points

(100 basis points is 1 percentage point) in the year. The repo rate now stands at

8.5% and base rates for the largest private and government-owned banks are

close to 10%. The impact of a series of hikes can be seen at various levels.

According to October figures, the Index of Industrial Production (IIP)

contracted by 5.1%, the worst fall since March 2009. Gross domestic product

for the second quarter of 2011-12 declined to 6.9% compared with 7.7% in the

first quarter. RBI data for scheduled commercial banks shows that credit growth

has slowed from 24% in January to 18% in November (provisional figures).


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High interest burden and raw material cost on the back of rising commodity

inflation has also taken a toll on companies profits.

Companies are losing out on pricing power and are not in a position to pass on

the increase in input costs. The situation has got compounded by the sharpincrease in financial costs. This is hitting earnings, said Mahajan.

Additionally, the rupee saw a record fall against the dollar in 2011. The fall in

rupee was inevitable on account of the high current account deficit, said

Vaibhav Agarwal, vice-president (research), Angel Broking Ltd. As capital

flows dried up, matters became worse. On 23 December, it was trading at Rs.

53.0 per dollar.

At the end of November, with the announcement of opening of foreign directinvestment in the retail segment, there was a ray of hope that government may

finally act on policy matters. However, this retracted within days. Investor

confidence got battered, leading many domestic and global brokerages to lower

the Sensex target for 2012. Global factors have affected the performance of our

market to some extent, but mainly domestic factors have come to haunt us.

Policy inaction is possibly the single-largest factor, said Mahajan.

Adding pressure were external factors such as the ongoing European debt

crises; confusion remains despite the bailout package for Greece and liquidity

infusion by central banks. Then there are concerns that the US will record a

slower-than-expected growth. All this put together led markets lower

throughout the year; it declined at a greater pace in the last three months. The

Indian equity market on account of its domestic issues along with global chaos

was one of the worst performers with at least 23% decline in 2011. MSCI

World Index declined 11% and MSCI Emerging markets index declined 21%.

Turbulent markets shook the MF street as well. Equity diversified funds lostabout 22% on average. Mid- and small-cap funds lost a bit more; their average

loss for 2011 stands at about 26%. As markets and funds slipped lower and

lower, interest rates rose and other asset classes, such as gold and bonds, saw

investor inflows and higher returns.

NCDs and infrastructure bonds

At least seven companies issued retail non-convertible debentures (NCDs). The

prominent ones included State Bank of India and Shriram Transport FinanceLtd; Muthoot Finance Ltd, Religare Finvest Ltd and India Infoline Investment


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Securities Ltd were first-time issuers. Given the dismal state of equity markets,

NCDs presented a good opportunity to balance portfolio returns and add income

with returns of 9.95% at the start of the year to 12.5% in the second half. In

most cases, the credit rating for companies was AA or higher, indicating low

credit risk.

In addition to NCDs, infrastructure finance companies, including IDFC Ltd,

IFCI Ltd and LT Infrastructure Finance Ltd, issued infrastructure bonds. Along

with high rates, these bonds provide an additional tax deduction of up to

R20,000 under section 80CCF. So if you invested Rs. 20,000 in an IDFC

infrastructure bond with an annual coupon rate of 9%, the post-tax compounded

annual growth rate yield on the five-year cumulative option would be as much

as 14.7%. The issuers in this space, too, were rated AA or higher. Interestincome of both NCDs and infrastructure bonds is taxable.

Gold

Amid volatility in risky assets and poor outlook for the dollar, gold prices saw a

sustained rally in 2011; MCX gold prices have increased 33.8% year-to-date.

Global growth fears and uncertain economic outlook spelt good news for gold

demand. Buying was up not only from investors through commodity and

exchange-traded funds (ETFs), but also from countries looking to increase theirsovereign holdings.

On the domestic front, assets under management (AUM) of gold ETFs went up

from Rs. 3,581 crore in January to Rs. 9,568 crore at the end of November.

December saw some volatility in gold prices. Even so, experts remain bullish;

weakening global scenario, economic uncertainty and risk aversion is likely to

keep gold demand high. Some, however, are cautious.

We believe that gold has probably touched its peak in dollar terms, said GopalAgarwal, CIO, Mirae Asset Global Investments (India) Ltd. This is because the

Euro zone is refraining from purchasing bonds. On the other hand, the US is

witnessing improved data points, which augurs well for the economy. In this

scenario, there would be limited scope for gold to regain its peak.


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Performance of Indian Stock Market during 2012

Investor wealth soared by 27 per cent to around Rs. 67.7 lakh crore in 2012 with

the stock indices gaining nearly 25 per cent on hefty capital inflows and of late

a slew of reform measures even as concerns remain over economic growth andrising fiscal deficit.

Indian bourses made a dramatic turnaround after a meltdown in 2011, leaving

behind strong optimism about a bullish 2013 in hopes of RBI rate cut, hefty

capital inflows, a recovery in global economy and excellent earnings growth in

the third quarter of 2012-13.

The smart recovery helped investor wealth to soar by over Rs. 14.5 lakh crore toRs. 67,78,609 crore on December 21, 2012 against Rs. 53,12,875 crore at the

end of last year.

The Q3 earnings, which are most likely to beat the market pundits, indications

of more reforms by the UPA government and hopes of increase in retail

participation in quality IPO/FPO and OFS in the near future expected to

augment the bullish fervour in 2013, an analyst said.

The BSE sensitive index Sensex posted impressive gains of 3,787 points, or

24.5 per cent, at 19,242 on December 21, 2012, against preceding year-end's

close of 15,454.92 points.

The Sensex had lost 5,054 points, or over 24 per cent, during 2011.

The National Stock Exchange's Nifty also spurted by 1,223 points or 26.5 per

cent to 5,847.70 on December 21, 2012 from previous yearend's close of4,624.30.

Investors ignored dwindling industrial output, declining exports, ballooning

fiscal deficit, overall gloomy economic atmosphere in domestic and

international markets amid fear of European debt crisis to spiral over world-

wide.

Foreign institutional investors (FIIs) made the second largest investment in theIndian capital market in the year under review.


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As the Sebi data, FIIs pumped in Rs. 1,21,652 crore or $23.15 billion this year

till December 21. Previously, they had made biggest investments of Rs.

1,33,266 crore or $29.36 billion in equities during 2010.

Kishor P Ostwal, CMD of CNI Research Ltd said a few big investors made a

large profit in the market as select stocks scored new highs in view of paucity of

floating stocks.

However, retail investors were not benefitted either in the secondary market

IPO market and were seen selling their holdings, as a result the public

ownership in the India Inc. came down to 6-7 per cent as against a high of 15

per cent 2007, he said.

Though the Sensex could not surpass its all-time peak registered in 2008, the

sectoral indices like BSE-FMCG, BSE-HC, BSE-CD and BSE-Auto logged

their historical highs during the year on hectic buying by foreign funds.

Analysts said at the beginning of 2012 investors feared of further slide in view

of corruption scams.

However, the market surprised everyone by rising almost 1,739 points or 11.25

per cent, largest monthly rise in absolute term in the month of January in any

calendar year, following hectic buying by Foreign funds.

It was also the biggest monthly performance since September 2010 when it had

gained by 2,098 points or 11.67 per cent.

The rally in the month was driven by strong global cues on hopes of some

stabilization in the Europe and gradual improvement in the US economic data.

On domestic front, the government's decision to allow

Qualified Foreign Investors (QFI) to invest directly in local equities from

January 15, 2012 and signs of more foreign funds inflow also underpinned

sentiment.

The Union Budget, which was delayed this year due to the Assembly polls in


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five states, presented by then Finance Minister Pranab Mukherjee on March 16

failed to enthuse the investors and plans to revive the economy.

The market then turned negative and remained dull for the next few months due

to slowdown in GDP growth, worries over macroeconomic conditions due to

higher global crude oil prices, as India imports two-third of its oil consumption,

rising trade deficit, weakening currency and global uncertainty.

Fears that reform process may take back seat after the ruling Congress party

suffered a setback in some states in March and cut in China's growth target also

weighed on the market sentiment.

Revival of monsoon at the fag-end and Moody's retaining stable outlook on

India supported the weak stock markets. Moreover, announcement of reform

measures such as allowing FDI in multi-brand retail and downsizing the LPG

subsidy by the government later pushed the Sensex higher since September.

The Sensex moved in a range of 19,612.18 and 15,358.02 before ending at

19,242.00 on December 21, 2012, displaying a rise or 3,787.08 points or 24.50

per cent.

The wide-based S&P CNX Nifty of the NSE also flared up by 1,223.40 points

or 26.46 per cent to settle at 5,847.70 on December 21, 2012.

On the global front, barring China which ended in the red, rest of the other

Asian markets ended firm. European as well as US stocks too exhibited strong

trend this year.


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Future Predictions for 2013

Morgan Stanley has argued in one of their recent reports that the Indian stock

market is likely to perform well in 2013 as it remains the most attractive relative

to other countries. In other words, while the Indian economy is in doldrums itremains more attractive than the United States and European Union as the last

two undergo economic upheaval, and this is the reason why investors and

foreign institution investors (FIIs) pour easy money into India. Morgan Stanley

calls this the TINA factor or There Is No Alternative. It also said, Our top-

down forecast is higher than the consensus, putting earnings in an even better

light.

Since India is relatively better off than the rest of the world, Morgan Stanley

cites Indian stock markets as an attractive destination even if there are plenty of

headwinds as far as Indian economic fundamentals are concerned. It said,

Global investors argue that India is a place where they would like to put money

to work because the other options do not seem attractive enough. This is a

peculiar approach because if nothing is attractive, investors wouldnt investors

be better off waiting and watching.

Despite this, it believes the Indian stock market offers good opportunities in

terms of diversification and stock picking because it believes its corporatefundamentals seem more stable. Consider the chart below:


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As you can see, Indian companies are at the top because they exhibit steady

growth in earnings, without too much variation. Even the coefficient of

variation is low which implies that earnings growth between all the companies

across the years is not that widely dispersed. India has the lowest standarddeviation of EPS growth at 13%, while US it is nearly three times volatile. Even

Indias growth rate since 2001 trumpsthat of US as well as developed markets

as a whole. This is one reason why global investors would prefer stable Indian

shores rather than foreign ones. The report said, Over time, not only has

earnings growth been comparable with that of the rest of the world, but the

earnings stream has also exhibited markedly lower volatility.

Apart from this Indias recent performance, which has been one of the best

performing stock markets YTD, has caught the eye of investors worldwide. This

means more investors are keen and keeping an eye on upcoming corporate

earnings, not to mention the slew of economic reforms and whether theyll be

passed in the parliament. Further more, Morgan Stanley has cited, Unlike in

2011, the earnings trend in 2012 mirrors Indias long-term record in earnings.


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Having said this, Morgan Stanley believes stock picking opportunities exists,

especially for passive investors. Diversification hinges upon having several

stocks, with each having low degree of deviation within each other in order to

reduce volatility. Diversification also will work if the stock market is notdominated by one sector alone. For instance, look at the table below:

You can clearly see that Russia has nearly 60% of the weightage in one sector

aloneenergy. It is billed as a gas and oil superpower rivalling to Saudi Arabia.

From a top-down perspective, it makes little sense to diversify even if stock

picking opportunities maybe there. Indias standard deviation across sector

weights remains one of the lowest across emerging stock markets. It said,


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Indias sectoral diversification seems the best across major emerging markets,

with low standard deviation on sector weights and low degree of single-sector

Working 2011-2012

It is quite amazing but true that the year 2011 has been the second worst year in the history ofIndian markets with a decline of 25% in the Nifty and 35% in the Mid cap indices(since the1980s at least). No prizes for guessing which was the worst year i.e. 2008. In USD terms the

performance was even more disastrous with losses of 44% given the 19% decline in the valueof the INR. The year began with cautious optimism after the fall that the markets had seen

post peaking off in November 2010. However a sequence of events, foreseeable andunforeseeable made this a disastrous year for equity investors. A lot will be written on theyear ahead and I have touched on some subjects in my previous articles a few weeks back.However sentimentally one thing is very apparent from all the strategy reports that I read

today, as well as the commentary in various media.

1. 2012 will be a very tough year for equity investors and it is unlikely that there will besignificant returns during this year.

2. India will continue to underperform given concerns on inflation, high interest ratesand poor governance.

I have infact not read more pessimistic commentary on India for a very long time as we seetoday. The same brokerages/research houses that were predicting Sensex at 23-24000 by the

end of 2011 a year back are now forecasting markets at 12000 (at the lower range) to 18000(at the median of the upper range). There are some who, albeit apologetically are predicting amove above 20,000 levels this year. However this is being done with a lot of caveats. Thefunniest are those reports where there are bull case, base case and bear case views where thedifference between the bear case and the bull case is over 50-60%.My take on the markets in 2012 is that we will see the Nifty/Sensex return anywhere between15-25% and the broader markets by 25-35%. I believe that sentimentally the markets have

bottomed out and the bottoming out, value wise will happen over the next few days or weeks.This should lead to a durable bottom being formed for the markets. I have touched on thelogic for the same to a large extent in my article on the 5 thof December, an updated versionof which I will present in brief and then more on the domestic situation and the markets.

The Euro zone Crisis The Euro zone crisis and the debt issues related toGreece, Italy and Spain have been the main contributory factors to the nervousness in theglobal equity markets over the last several months. The crisis has got accented by a lack offaith in the political system and its ability to resolve the issues. This issue has been discusseda lot so I will not go into the details of all of this, however I do have a contrarian view on thefuture direction of news flow from Euro zone. We now have new governmentsin Italy, Spain and Greece i.e. all the troubled countries. Two of them are lead by technocratsand one by the right wing party. As such, in my view the worst of the news flowfrom Europe is now in and we might not get incremental negative news flow over the next 4-5 weeks. This is likely to be similar to the negativity due to news out of the US around 3-4months back, which suddenly died out as the economic data started to improve. The entry ofthe IMF in the entire discussion combined with greater urgency to resolve the issues is also


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encouraging. Overall I do not expect Europe to create any deep cuts in the markets goingforward. This was the view that I had put out a few weeks back and seems to have played outwell. It seems clear now that although Euro zone will go through a cycle of deleveraging,slow growth, intermittent issues related to fiscal issues of troubled countries etc, the

probability of a Euro zone breakup seems remote at this stage. Intermittent occasions of bond

issuance of Italy and Spain will create volatility on those days. Infact if investors were soconcerned on the Euro it would not have fallen by just 2-3% against the USD in the year2011. As I wrote a couple of weeks back Europe has clearly avoided its Lehman Moment

US News flowThe news flow from the US has been mixed. Over the last few weeks thereseemed to be clear indications of an improvement in economic activity. The Fiscal issues willkeep on creating volatility periodically, however low borrowing costs and an improvingeconomy could lead to a Fiscal surprise next year.Overall economic activity seems to beimproving, albeit at a slow pace in the US and there does not seem to be the likelihood of adouble dip recession at this stage. Most corporates in the US are cash rich and marketvaluations are at just around 11X P/E for next year. Earning expectations for the year 2012

are pretty low with earnings growth forecast in the range of 0-5%. As such US news flow willcreate volatility but it does not look that it can create a fresh down move at this stage.Infact US has not only created conditions for a down move, but it has actually supportedglobal markets due to continuously improving economic data, especially related toemployment numbers. Technically too the movement of the key indices above 200DMAsand the breakdown of the similarity of the move from 2008 indicates further gains for USequities. The breakdown of VIX below 23-24 levels also indicates reduced risk aversion andgreater confidence. Typically such breakdowns are followed by multiweek up moves.GOLDAs I have written in detail in my previous article I expect 2012 to be a difficult yearfor gold. I expect a 20-25% correction before prices come to a level where actual demandrather than pure investment demand can support prices. Since I have written in detail earlier Iwill not repeat, however the most fancied asset class will have a tough time holding on.ChinaChina is one aspect about which I have not written earlier mainly due to the fact thatit is difficult to analyze it. However pessimism on China seems to be at its peak with theChinese markets trading at valuations that are at multiyear lows. The expectations of some, ofa hard landing in China do not seem to be playing out. The move from investment toconsumption led growth seems to be moving slowly. By letting the Yuan appreciate in lightof pressure on exports seems to have played out well. Inflation has also been controlled well

by demand & supply led measures as well as administrative dictates (which can only work inthat country and not in countries like India). The moderation in economic growth has beenhappening at a steady pace. However the key challenge will be holding up growth in light of

falling export demand, controlling excessive investments in unproductive areas and thebiggest factor will be the asset quality of Chinese banks and how they will hold up in light ofincreasingly challenging environment and pressure on profitability of Chinese corporates.The corporate sector in China is likely to be hit on two fronts i.e. higher wage costs due torapidly increasing salaries as well as the strong up move of the Yuan against most othercompeting currencies. Just as an example, over the last one year the Indian rupee is down20% against the USD and the Yuan is up nearly 6%. The way things look to me it seems the

base case will be a soft landing rather than a hard landing for China in the near term. The twobig surpluses that China has i.e. Current Account & Fiscal are vastly undervalued by themarkets in my view. Officially China seems to be aiming at an 8% growth next year which isextremely strong in the current environment. The challenge is health of the banking system

and how much it needs to be capitalized in order to support this growth as well as the state ofhealth of the Provincial Governments about which there is very less transparency.


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India domestic factors & outlook

The Indian markets had to make do with not only global issues but also several domesticissues in the year 2011 making it one of the most turbulent years in recent memory. Although

2008 was challenging for India, it was generally perceived at that stage that the factors arelargely external and as such should not have a lasting impact on the performance of theeconomy. We had also started giving lesser importance to the government as the economy

became more and more open. However 2011 was a year which showed the importance ofgovernance in promoting and sustaining economic growth as well as macroeconomicstability. The year 2011 was a year of high inflation, high interest rates, lack of policy makingas well as the most challenging year for the Indian rupee since 1992 (ex of 2008).The Rupee - The fall in the rupee is being attributed to high current account and fiscaldeficits, which is true to some extent. However it is more due to a lack of confidence in theeconomy in the near term as well as cash flow mismatches on exports and imports. Thisaspect is extremely important to understand. Given the way the rupee fell and the continuous

statements by policy makers that we are helpless in managing the rupee all importers haverun to hedge their positions and no exporter is hedging. This creates a very huge mismatch inthe short run. Let me try to explain. India has exports of broadly USD 20 bn a year andimports of USD 30 bn. Now this is a gap of USD 10 bn which is bridged by invisible flows,capital receipts, foreign borrowings, FDI etc etc. Now in a situation where everyone believesthat the rupee can only fall all importers want to hedge, however no exporter wants to do thesame. This creates a huge mismatch in the short run till the export proceeds flow in after a

period of 90-120 days. This also creates a tendency to delay export inflows in order to realizea better rupee value. This actually makes me believe that the first quarter of 2012 can be agood period for the INR as the panic fall period now seems to be over and export realizationswill start to come in. Other measures like reduction in holding period of Government andInfrastructure bonds as well as higher interest rates on NRI deposits should boost inflows. My

base case view will be for a 3-4 % rupee appreciation in the first quarter of 2012 unless anduntil there are huge capital outflows.Policy makingInitially we had a period in late 2010 and early 2011 when a large number of

projects got held up on environmental issues. Later on after the 2G issue we have seen asignificant decline in project approvals, takeoffs etc. This has got exacerbated by thecontinuous increase in policy rates by the RBI which has made lot of projects unviable.Reform measures have also got stalled. I believe that we are now at the absolute nadir of thedecision making cycle and things can only improve from here on. I expect this to happen postelection in February after which things would be much better.

Inflation would have come off much more sharply had it not been for the decline in the rupee.However the absolute correction in commodities and food prices combines with the strongbase effect will take inflation down to nearly 5% by March 2012. In case the rupee alsoappreciates as I expect it too the overall scenario could be much better in 2012. As such weshould have improving liquidity and much lower interest rates as we go through 2012 andthis will provide a tailwind for economic activity to pick up.


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The key to greater global investor confidence and domestic business confidence will lie in theurgency that the government will show for labour reforms, land reforms, implementation ofthe new Direct Tax Code (DTC) and the Goods & Services Tax (GST). All this can help

bring fiscal deficit under control but most importantly, it can raise the governance bar to anextent that India Inc has greater confidence to create larger capacities within the country.

To expect a runaway rise in Indian equity markets during 2013 would be a folly. There aretoo many areas of concern in the domestic and global economic environment for that tohappen. Much of domestic middle class savings continue to be diverted towards a passiveasset like gold or to post office savings which are utilised relatively inefficiently by the state

and central governments.

A pre-election subsidy heavy finance budget could derail fiscal deficit sharply. Globally,Europe is unlikely to be out of the woods before mid 2014 and the United States has its ownserious fiscal issues to grapple with. On the economic front, a 6-6.5% GDP growth during FY2013-14 and sustained policy reforms should be considered a possibility. For the equity

markets, a potential 10% to 15% rise during 2013 taking the Sensex in the vicinity of 22,000based on continued FII flows can be expected.

SECTORS IN 2013

The valuation gap between private sector banks and mid-sized PSU banks has widenedconsiderably during the last quarter. One can expect this to be bridged to some extent. Theasset quality concerns of PSU banks are likely to gradually diminish over the next couple ofquarters.

The IT sector may continue to underperform, but old economy sectors like cement, metals

will gain further momentum. 2012 favourites like pharmaceuticals and the consumptionstocks can be expected to continue their upward march, but at a slower pace.

Essentially any upward swing in economic scenario hinges on the political will to set thingsright. Corporate India is ready out there to up their stakes if the government creates theenvironment. The ball is clearly in the governments court.
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Performance of Indian Stock Market (1)

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