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The month of November saw the markets being rocked by a spate of scams
with the latest being the recent revelations on corruption in bank lending.
Global markets also took a breather after rallying in September and October.
Eruption of fresh concerns on Eurozone and exchange of hostilities between
North and South Korea also led to a global sell-off. Indian markets have
reacted sharply to the scams with most stocks from the banking, financial
services and realty among the major losers. Stocks with leveraged balance
sheets also came in for some heavy selling.
Barring the scams, which are a definite sentiment dampener, we do not see
any deterioration in economic and corporate fundamentals. The results had
been almost in line and the corporate earnings outlook remains positive. In
its latest economic review, RBI had signaled that it may take a pause in
monetary tightening, given the then prevailing economic situation. Going
by recent measures by China to control inflation, we believe commodity
prices may remain soft.
We believe the market decline presents an opportunity to allocate fresh
funds into equities. While there could be further downsides from these
levels due to unforeseen circumstances, we believe markets are not in the
overvalued zone. Thus, at current levels, we recommend buying /
accumulating fundamentally sound stocks available at reasonable
valuations. We have been bullish on several stocks across sectors viz.
Banking, Capital Goods, IT, Construction, Logistics, etc. We believe that,
several large-cap and mid-cap stocks which we had been recommending
have become more attractive and should be bought / accumulated.
Global equities face a reality check
After rallying in September and October, the global markets took a breather. The
US Federal Reserve announced the much-awaited QE2 package, which aims at buying
bonds worth USD 600 bn. The idea is to infuse another dose of liquidity into the
system which would inflate asset prices and keep deflationatory risks at bay. However,
post the announcement of the QE2, markets have been largely directionless in
the absence of any major event.
Investor sentiment remained weak on concerns about the sovereign health in the
Eurozone periphery and expectations of further monetary tightening in fast-growing
China. Ireland entered into talks with the IMF for a bailout package to shore up its
credit worthiness and ailing banking sector. Investors have turned cautious on other
Eurozone countries with weak balance sheets, including Spain and Portugal as reflected
by sharp increase in their respective bond yields.
China raised its reserve ratio by 50 bps for the second time in November to 18%.
Elsewhere in Asia, there were fresh reports of exchange of hostilities between North
and South Korea. There were reports of shelling by North Korea causing a few casualties
and injuries to civilians. Responding to these emerging tensions, the US sent its
aircraft carrier with a view to rein in North Korea.
Sensex rocked by revelations on corruption in bank lending
Continuing from its firm trend in October, the Sensex had a good start for the month
even closing above the 21K mark. However, slowdown in FII flow and weakness in
global markets resulted in market losing ground. Domestically, this month has seen
several controversies and scams.
The stock of SKS microfinance lost over 50% of value as the state of Andhra
Pradesh sought to bring the microfinance business under greater regulatory oversight.
Consequently, the business of SKS has been severely impaired with the company
likely facing difficulties in conducting village-level meetings and there also a
fall in collections. The developments came as a massive jolt to a nascent business
which was growing at an exponential pace.
Markets were at the receiving end following the 2G spectrum scam which was reported
to have cost the national exchequer a massive Rs1750bn.
However, the selling intensified sharply on revelations by CBI that, several officials
from the leading financial institutions and public sector banks were accepting bribes
in return for approving loans. The worst hit was LIC Housing Finance. Among others,
stocks of Central Bank of India and Bank of India also fell. Reportedly, these senior
officials were involved in taking bribes for helping corporates get loans through a
conduit which is a company named Money Matters. The selling did not remain restricted
to these PSBs but actually spread to real estate companies, financial services
companies (with connection to MoneyMatters) as well as other corporates.
Inflation moderates marginally
Inflation for the month of October stood at 8.6%, according to the new Wholesale
Price Index (WPI) series released by the government. However, month-on-month
there was a marginal rise in WPI. Manufactured products inflation firmed to 4.75%
while fuel inflation came in at 11% and primary articles at 16.7%.
In terms of broad components, food price inflation moderated to 9.9% - first time in
single digits since May 2009. Non-food manufacturing inflation, which is indicative
of demand side price pressures, edged up marginally in October to 5.1% from
4.96% in September.
The RBI has forecast average inflation of 6.0% by the end of FY11, counting on a
normal monsoon, which would ease pressure on food prices. However, this forecast
could be at risk given sticky food inflation and upward pressure on commodities due
to the recent QE2 package by US Fed (USD tends to have a inverse relation with
Crude). We believe inflation is a real concern for India given its direct linkage to
interest rates, impoverishment of weaker sections and formation of asset bubbles.
RBI continues with its rate hikes but signals a possible pause
The Reserve Bank of India (RBI) raised repo and reverse repo rates for the sixth consecutive
time this year by 25bps to 6.25% and 5.25% respectively. This was largely
in line with street expectations. With spiraling prices, the housing sector caught attention
of the regulator and it has tightened lending norms further for this sector.
The policy statement has also made a reference to the liquidity and has made it
clear that RBI is not very comfortable with the liquidity situation and may act to actively
manage the same. However, the RBI's statement on a possible pause on interest
rate hikes under prevailing circumstances came as a mild surprise and likely indicates
its comfort with the prevailing domestic inflation - growth balance.
Among specific measures, the RBI raised risk weights on housing loans above Rs.7.5
mn to 125% from 100% earlier. The central bank showed its discomfort with the
teaser rate scheme, which is popular among home loan borrowers.
Domestic macros - IIP growth strong but base effect catching up…
September IIP (Index of Industrial Production) rose 4.4% yoy well below of market
predictions. Mining, Manufacturing and Electricity sectors for the month of September
2010 grew at rates of 5.3%, 4.5% and 1.7% respectively as compared to the
corresponding previous period. As per use-based classification, Basic goods, Capital
Goods and Intermediate goods posted growth of 3.5%, (-) 4.2% and 10.3% yoy
respectively. The Consumer durables and Consumer non-durables have recorded
growth of 10.9% (as against a consistent 20% growth in past months) and 2.5%
respectively.
While the IIP data has been sedate, our interactions with management of Capital
Goods companies indicate continued traction and buoyancy in fresh enquiries. The
consumer durables sector is also expected to regain momentum as robust agri-production
should help boost demand.
Nevertheless, going forward, we expect moderate growth in IIP on back of high
base of last year. We also expect RBI to keep the policy rates unchanged in near
term to gauge the full transmission of its policy changes done earlier.
Pace of FII fund flow moderated
Even as there were expectations of an impending correction, foreign funds continued
to repose faith in Indian equities. Net flows in the cash market aggregated to
about Rs.17.7 bn during the month (till 25th November). Following, the global concerns
related to Eurozone and Korean hostilities, there has been some moderation in
FII flows. The recent 2G scam and bribery revelations may have sullied India's reputation
among foreign investors. However, we believe that rather than turning cautious,
FIIs may buy more into the market correction as the India growth story remains
intact.
While the increased FII interest is positive for India in the near term, it also exposes
us to the risk of liquidity withdrawal. This risk is more pronounced in the backdrop of
consistent selling by domestic FIs. Significant domestic funds will be needed to support
the markets in the event of a sudden outflow of funds from India.
Recommendation
In the past few days, markets have witnessed a sharp sell-off post the 2G and bribery
scams. While the benchmarks may have lost close to 10% from its highs, several
individual stocks and sectors have lost in excess of 20% plus. The sell-off provides an
opportunity for investors to invest in stocks that have strong potential but may be out
of favour currently. Those investors who were sitting on sidelines fearing a correction
have a good opportunity take exposure into the markets.
Barring the scams, which are a definite sentiment dampener, we do not see any
deterioration in economic and corporate fundamentals. The results had been almost
in line and the corporate earnings outlook remains robust. RBI has signaled that it
nearing an end to the Interest rates raising cycle. Going by recent measures by
China to control inflation, we believe commodity prices may even soften from
hereon.
In the previous update, we had indicated that market valuations are close to fair
value zone. Post the recent sell-off, valuations have become much more reasonable
if not very attractive. Thus, at current levels, we recommend buying / accumulating
fundamentally sound stocks available at reasonable valuations. We have been bullish
on several stocks across sectors viz. Banking, Capital Goods, IT, Construction,
Logistics, etc. We believe that, large-cap and mid-cap stocks which we had been
recommending have also become more attractive and should be bought / accumulated.
The risk to our moderately bullish call comes from any disruptive event in global
economy.
Preferred picks
Sector Stocks
Automobiles: TVS Motors
Banking: Axis Bank, ICICI Bank, J&K Bank, SBI
Construction: BGR Energy, Pratibha Industries, Sunil Hi Tech
Engineering: Cummins India, Diamond Power Infrastructure,
Greaves Cotton, L&T, Tractors India
Information Technology: Infosys, TCS, Zensar
Logistics:: Redington, Allcargo, GDL
Media:: HT Media
NBFCs:: India Infoline, SREI Infra
Other Midcaps:: JBF, Time Techno, Shree Lakshmi Cotsyns
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