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MARKET STRATEGY
Domestic markets continued to remain weak since the beginning of the
month led by continued FII selling. Lower than expected IIP data coupled
with higher inflation figures prompted further selling from the domestic
and foreign institutions. High food inflation and soaring global commodity
prices continued to play spoilsport. Thus, RBI also hiked the key interest
rates to tame inflation and also raised inflation forecast for current fiscal by
150 basis points to 7%.
US markets continued to outperform the other markets in Jan, 2011 led by
impact of QE2, strong quarterly earnings as well as better home sales data.
Along with this, Fed Reserve also kept the interest rates unchanged and
fourth quarter GDP data is also awaited. Other markets remained weak with
contraction seen in UK economy growth and high inflation continued to
remain China's main concern.
We believe that going forward, markets are likely to be governed by interest
rate movements, inflation, budgetary announcements as well as allocations,
thrust on infrastructure spending as well as news coming in from US,
Europe and China. Thus in the near term, markets may remain sideways till
the time near term concerns are addressed while for a longer term, we
believe markets are not in the overvalued zone. Investors entering at current
levels must be prepared for a longer time horizon for making gains. We
have been bullish on several stocks across sectors such as Banking, Capital
goods, Construction, IT, Media, Metals etc Thus, at current levels, we
recommend buying / accumulating fundamentally sound stocks available at
reasonable valuations with a longer term horizon.
Global markets
US markets continued to outperform the other markets in Jan, 2011 due to impact
of QE2 as well as strong quarterly earnings. Market momentum was also boosted by
successful bond auction in Portugal that eased fears about euro zone's debt crisis.
Housing data regarding new home sales also came better than expected. Fed also
decided to keep the key benchmark rates unchanged along with continuation of its
$600 bn bond buying program to stimulate the economy. This supported the indices.
Along with this, advance estimate of fourth quarter GDP came at 3.2%, better than
third quarter data of 2.6%.
European markets remained range bound with worries regarding euro zone debt
crisis. But these concerns were eased off by successful bond auction in Portugal.
Along with this, Japan's pledge to buy Eurozone bonds helped ease European debt
jitters. However, correction was witnessed with release of official data on UK
economy growth which contracted by 0.5 per cent. This would reduce the expectations
regarding hike in interest rates from Bank of England.
Chinese markets remained weak in last one month with concerns related to high
inflation primarily from high food and commodity prices. China further lifted lenders'
reserve rate requirements by 50 basis points from February to temper inflation. This
was the fourth increase in just two months. While Chinese economy expanded by
10.3% during 2010 as compared to 9.2% in 2009 but controlling inflation will continue
to remain top priority for the government in 2011 and we expect it to further
increase the bank reserve requirement to tame inflation.
Indian markets
Domestic markets continued to remain weak since the beginning of the month led
by continued FII selling. Lower than expected IIP data coupled with higher inflation
figures prompted further selling from the domestic and foreign institutions. High food
inflation and soaring global commodity prices continued to play spoilsport. However,
we had seen better than expected numbers so far from banking, capital goods as
well as a few large IT stocks but capital goods and construction segment disappointed
in terms of lack of order inflows. Markets were factoring in 25 bps hike in
the key policy rates during the monetary policy meet and the hike was in line with
expectations.
State owned oil marketing companies raised the prices of petrol by Rs 2.54 per litre
from mid-January. This was the second increase in past one month and came on the
back of soaring international crude oil prices which moved above $92 per barrel.
With this increase, petrol prices are up by Rs 7 a litre since being decontrolled last
June. Thus post this increase, oil and marketing companies would be able to reduce
their losses on sale of petrol while they are expected to incur a revenue loss of
nearly Rs 730 bn during the current financial year on sale of diesel, domestic LPG
and kerosene. If crude soars up again above $95 per barrel and diesel prices are not
de-regulated, revenue losses for oil and marketing companies will continue to increase
until government cuts duties on crude oil and refined products.
During Jan, 2011, government also tried to battle out issues related to allegations on
mismanagement and corruption and reshuffled key portfolios.
Going forward, markets are likely to be governed by quarterly numbers, interest rate
movements, inflation, budgetary announcements as well as allocations, thrust on
infrastructure spending, order inflow scenario as well as global factors emerging
from Europe, US and China. Higher interest rates may impact interest rate sensitive
sectors such as infrastructure, real estate and utilities while higher commodity prices
may impact sectors like automobile and FMCG. We would also continuously look
out for the future guidance from companies in the key sectors.
Also we expect the budget to focus on addressing the supply side issues as well as
improving the implementation of infrastructure projects. Maintaining fiscal prudence
will also be important for FY12 in the absence of 3G license revenues and rising
current account deficit.
IIP nosedived to 2.7% for Nov, 2010
IIP figures for the month of November nosedived to 2.7 per cent as against 11.3 per
cent in the same period a year-ago. Industrial growth was pulled down by dismal
performance of manufacturing sector, particularly the consumer non-durables as well
as in intermediate goods. During Apr-Nov'10, Mining Index grew by 8% against
8.5% (for Apr-Nov'09), Manufacturing Index grew by 10.2% against 7.5%, Electricity
Index grew by 4.6% against 5.7% and overall IIP grew by 9.6% against 7.4%.
For October 2010, IIP figures have been revised upwards to 11.3% from 10.8%. We
expect IIP numbers for the next few months to edge lower in comparison with last
year. However, we continue to expect IIP to grow by nearly 9% in FY11, supporting
8.5% GDP growth expectation.
Inflation continued to remain above comfort zone
Wholesale Price Index (WPI) for Dec, 2010 rose to 8.43 per cent as compared to
7.48 per cent for the previous month and 6.92 per cent in the corresponding month
of 2009. This was due to rise in food and minerals prices as well as increase in fuel
product inflation. On a month on month basis, primary article inflation increased
sharply to 16.5% (vs 13% in Nov), manufacturing products inflation stood at 4.46%
(vs 4.56% in Nov) and fuel group inflation stood at 11.2% (vs 10.32% in Nov).
Food article inflation for the week ended 15th Jan, 2011 stood at 15.57% vs
15.52% in the prior week while fuel inflation climbed to 10.87% for week ended
15th Jan, 2011 vs 11.53% the previous week.
The higher-than-expected wholesale price rise in December has prompted the Prime
Minister's Economic Panel to further revise upwards the March end inflation forecast
to up to 7% from 6.5% estimated earlier. Going forward, we believe that higher
food and mineral prices as well as fuel prices, post the hike in petrol prices by Rs 2.5
per litre, will continue to keep inflation on the higher side. Along with this, continuously
soaring global crude prices may also complicate the task of policymakers.
Thus, with inflation being above the comfort zone of RBI, it will continue to focus on
rate hikes to control inflation while maintaining the growth momentum
Monetary policy review
RBI adopted a calibrated approach and increased repo and reverse repo rates by 25
bps each while keeping the CRR and SLR unchanged. It also raised the inflation forecast
for current fiscal by 150 basis points to 7% while maintained its economic
growth forecast at 8.5% with an upward bias. It also extended additional liquidity
support of 1% further till 8th April, 2011. However, RBI also listed out concerns related
to high credit to deposit ratio, spillover of high food prices to manufactured
products, widening trade and fiscal deficit.
We continue to believe that RBI is walking a tightrope in managing growth and containing
inflationary expectations. Inflation continued to remain high due to increase
in food, fuel as well as global commodity prices coupled with supply side pressures.
Thus in order to bring inflation under control, we expect RBI to continue with its
monetary tightening stance over the course of next fiscal year as well.
FII's remained net sellers during the month
Foreign funds remained net sellers in the month of Jan also with net outflows in the
cash market stood at Rs.34.4 bn while mutual funds have remained turned net buyers
and net inflows stood at Rs.9 bn. Foreign fund flows in January have been impacted
by lower IIP, higher inflation, rate hikes as well as expectations of recovery in
US . We believe that in the event of consistent selling from FII's, significant domestic
inflows might be needed to support the markets near current levels.
Recommendation
Markets remained weak and volatile during last one month led by continued FII selling
coupled with lower than expected IIP data, higher inflation as well as rate hike
announcements. Sell off witnessed in stocks and sectors provides an opportunity to
buy with a longer term horizon. In our previous note, we had mentioned that we
expect correction in the near term since markets seemed to be fairly valued on FY11
estimates and had recommended investors to buy stocks based on FY12 estimates.
US continued to outperform other markets while Europe and China continued to
underperform but any negative news regarding poor economic data in US may impact
domestic markets also. Better than expected recovery in US can also result in
reduction in foreign inflows in the near term. Any further contraction in UK economy
or increase in bank reserve requirement in China may have an adverse impact on
domestic markets also.
Going forward, markets are likely to be governed by interest rate movements, inflation,
budgetary announcements as well as allocations, thrust on infrastructure spending,
order inflow scenario as well as global factors emerging from Europe, US and
China. We expect the budget to focus more on addressing the supply side issues as
well as improving the implementation of infrastructure projects. Maintaining fiscal
prudence will also be important for FY12 in the absence of 3G license revenues and
rising current account deficit.
Thus in the near term, markets may remain sideways till the time near term concerns
are addressed while for a longer term, we believe markets are not in the overvalued
zone. Investors entering at current levels must be prepared for a longer time
horizon for making gains. We have been bullish on several stocks across sectors such
as Banking, Capital goods, Construction, IT, Media, Metals etc Thus, at current levels,
we recommend buying / accumulating fundamentally sound stocks available at
reasonable valuations with a longer term horizon.
Preferred picks
Sector Stocks
Automobiles Bajaj Auto
Banking Axis Bank, ICICI Bank, HDFC Bank, SBI, Punjab National Bank
Construction BGR Energy, Pratibha Industries, IRB Infra
Engineering BHEL, Greaves Cotton, Voltas, Diamond Power,
Cummins India, Gujarat Apollo
Information Technology Infosys, KPIT, TCS, NIIT Tech
Media HT Media, Sun TV
Metals & Mining Sesa Goa
NBFC LIC Housing Finance
Oil & Gas Cairn India
Other Midcaps Time Techno
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MARKET STRATEGY
Domestic markets continued to remain weak since the beginning of the
month led by continued FII selling. Lower than expected IIP data coupled
with higher inflation figures prompted further selling from the domestic
and foreign institutions. High food inflation and soaring global commodity
prices continued to play spoilsport. Thus, RBI also hiked the key interest
rates to tame inflation and also raised inflation forecast for current fiscal by
150 basis points to 7%.
US markets continued to outperform the other markets in Jan, 2011 led by
impact of QE2, strong quarterly earnings as well as better home sales data.
Along with this, Fed Reserve also kept the interest rates unchanged and
fourth quarter GDP data is also awaited. Other markets remained weak with
contraction seen in UK economy growth and high inflation continued to
remain China's main concern.
We believe that going forward, markets are likely to be governed by interest
rate movements, inflation, budgetary announcements as well as allocations,
thrust on infrastructure spending as well as news coming in from US,
Europe and China. Thus in the near term, markets may remain sideways till
the time near term concerns are addressed while for a longer term, we
believe markets are not in the overvalued zone. Investors entering at current
levels must be prepared for a longer time horizon for making gains. We
have been bullish on several stocks across sectors such as Banking, Capital
goods, Construction, IT, Media, Metals etc Thus, at current levels, we
recommend buying / accumulating fundamentally sound stocks available at
reasonable valuations with a longer term horizon.
Global markets
US markets continued to outperform the other markets in Jan, 2011 due to impact
of QE2 as well as strong quarterly earnings. Market momentum was also boosted by
successful bond auction in Portugal that eased fears about euro zone's debt crisis.
Housing data regarding new home sales also came better than expected. Fed also
decided to keep the key benchmark rates unchanged along with continuation of its
$600 bn bond buying program to stimulate the economy. This supported the indices.
Along with this, advance estimate of fourth quarter GDP came at 3.2%, better than
third quarter data of 2.6%.
European markets remained range bound with worries regarding euro zone debt
crisis. But these concerns were eased off by successful bond auction in Portugal.
Along with this, Japan's pledge to buy Eurozone bonds helped ease European debt
jitters. However, correction was witnessed with release of official data on UK
economy growth which contracted by 0.5 per cent. This would reduce the expectations
regarding hike in interest rates from Bank of England.
Chinese markets remained weak in last one month with concerns related to high
inflation primarily from high food and commodity prices. China further lifted lenders'
reserve rate requirements by 50 basis points from February to temper inflation. This
was the fourth increase in just two months. While Chinese economy expanded by
10.3% during 2010 as compared to 9.2% in 2009 but controlling inflation will continue
to remain top priority for the government in 2011 and we expect it to further
increase the bank reserve requirement to tame inflation.
Indian markets
Domestic markets continued to remain weak since the beginning of the month led
by continued FII selling. Lower than expected IIP data coupled with higher inflation
figures prompted further selling from the domestic and foreign institutions. High food
inflation and soaring global commodity prices continued to play spoilsport. However,
we had seen better than expected numbers so far from banking, capital goods as
well as a few large IT stocks but capital goods and construction segment disappointed
in terms of lack of order inflows. Markets were factoring in 25 bps hike in
the key policy rates during the monetary policy meet and the hike was in line with
expectations.
State owned oil marketing companies raised the prices of petrol by Rs 2.54 per litre
from mid-January. This was the second increase in past one month and came on the
back of soaring international crude oil prices which moved above $92 per barrel.
With this increase, petrol prices are up by Rs 7 a litre since being decontrolled last
June. Thus post this increase, oil and marketing companies would be able to reduce
their losses on sale of petrol while they are expected to incur a revenue loss of
nearly Rs 730 bn during the current financial year on sale of diesel, domestic LPG
and kerosene. If crude soars up again above $95 per barrel and diesel prices are not
de-regulated, revenue losses for oil and marketing companies will continue to increase
until government cuts duties on crude oil and refined products.
During Jan, 2011, government also tried to battle out issues related to allegations on
mismanagement and corruption and reshuffled key portfolios.
Going forward, markets are likely to be governed by quarterly numbers, interest rate
movements, inflation, budgetary announcements as well as allocations, thrust on
infrastructure spending, order inflow scenario as well as global factors emerging
from Europe, US and China. Higher interest rates may impact interest rate sensitive
sectors such as infrastructure, real estate and utilities while higher commodity prices
may impact sectors like automobile and FMCG. We would also continuously look
out for the future guidance from companies in the key sectors.
Also we expect the budget to focus on addressing the supply side issues as well as
improving the implementation of infrastructure projects. Maintaining fiscal prudence
will also be important for FY12 in the absence of 3G license revenues and rising
current account deficit.
IIP nosedived to 2.7% for Nov, 2010
IIP figures for the month of November nosedived to 2.7 per cent as against 11.3 per
cent in the same period a year-ago. Industrial growth was pulled down by dismal
performance of manufacturing sector, particularly the consumer non-durables as well
as in intermediate goods. During Apr-Nov'10, Mining Index grew by 8% against
8.5% (for Apr-Nov'09), Manufacturing Index grew by 10.2% against 7.5%, Electricity
Index grew by 4.6% against 5.7% and overall IIP grew by 9.6% against 7.4%.
For October 2010, IIP figures have been revised upwards to 11.3% from 10.8%. We
expect IIP numbers for the next few months to edge lower in comparison with last
year. However, we continue to expect IIP to grow by nearly 9% in FY11, supporting
8.5% GDP growth expectation.
Inflation continued to remain above comfort zone
Wholesale Price Index (WPI) for Dec, 2010 rose to 8.43 per cent as compared to
7.48 per cent for the previous month and 6.92 per cent in the corresponding month
of 2009. This was due to rise in food and minerals prices as well as increase in fuel
product inflation. On a month on month basis, primary article inflation increased
sharply to 16.5% (vs 13% in Nov), manufacturing products inflation stood at 4.46%
(vs 4.56% in Nov) and fuel group inflation stood at 11.2% (vs 10.32% in Nov).
Food article inflation for the week ended 15th Jan, 2011 stood at 15.57% vs
15.52% in the prior week while fuel inflation climbed to 10.87% for week ended
15th Jan, 2011 vs 11.53% the previous week.
The higher-than-expected wholesale price rise in December has prompted the Prime
Minister's Economic Panel to further revise upwards the March end inflation forecast
to up to 7% from 6.5% estimated earlier. Going forward, we believe that higher
food and mineral prices as well as fuel prices, post the hike in petrol prices by Rs 2.5
per litre, will continue to keep inflation on the higher side. Along with this, continuously
soaring global crude prices may also complicate the task of policymakers.
Thus, with inflation being above the comfort zone of RBI, it will continue to focus on
rate hikes to control inflation while maintaining the growth momentum
Monetary policy review
RBI adopted a calibrated approach and increased repo and reverse repo rates by 25
bps each while keeping the CRR and SLR unchanged. It also raised the inflation forecast
for current fiscal by 150 basis points to 7% while maintained its economic
growth forecast at 8.5% with an upward bias. It also extended additional liquidity
support of 1% further till 8th April, 2011. However, RBI also listed out concerns related
to high credit to deposit ratio, spillover of high food prices to manufactured
products, widening trade and fiscal deficit.
We continue to believe that RBI is walking a tightrope in managing growth and containing
inflationary expectations. Inflation continued to remain high due to increase
in food, fuel as well as global commodity prices coupled with supply side pressures.
Thus in order to bring inflation under control, we expect RBI to continue with its
monetary tightening stance over the course of next fiscal year as well.
FII's remained net sellers during the month
Foreign funds remained net sellers in the month of Jan also with net outflows in the
cash market stood at Rs.34.4 bn while mutual funds have remained turned net buyers
and net inflows stood at Rs.9 bn. Foreign fund flows in January have been impacted
by lower IIP, higher inflation, rate hikes as well as expectations of recovery in
US . We believe that in the event of consistent selling from FII's, significant domestic
inflows might be needed to support the markets near current levels.
Recommendation
Markets remained weak and volatile during last one month led by continued FII selling
coupled with lower than expected IIP data, higher inflation as well as rate hike
announcements. Sell off witnessed in stocks and sectors provides an opportunity to
buy with a longer term horizon. In our previous note, we had mentioned that we
expect correction in the near term since markets seemed to be fairly valued on FY11
estimates and had recommended investors to buy stocks based on FY12 estimates.
US continued to outperform other markets while Europe and China continued to
underperform but any negative news regarding poor economic data in US may impact
domestic markets also. Better than expected recovery in US can also result in
reduction in foreign inflows in the near term. Any further contraction in UK economy
or increase in bank reserve requirement in China may have an adverse impact on
domestic markets also.
Going forward, markets are likely to be governed by interest rate movements, inflation,
budgetary announcements as well as allocations, thrust on infrastructure spending,
order inflow scenario as well as global factors emerging from Europe, US and
China. We expect the budget to focus more on addressing the supply side issues as
well as improving the implementation of infrastructure projects. Maintaining fiscal
prudence will also be important for FY12 in the absence of 3G license revenues and
rising current account deficit.
Thus in the near term, markets may remain sideways till the time near term concerns
are addressed while for a longer term, we believe markets are not in the overvalued
zone. Investors entering at current levels must be prepared for a longer time
horizon for making gains. We have been bullish on several stocks across sectors such
as Banking, Capital goods, Construction, IT, Media, Metals etc Thus, at current levels,
we recommend buying / accumulating fundamentally sound stocks available at
reasonable valuations with a longer term horizon.
Preferred picks
Sector Stocks
Automobiles Bajaj Auto
Banking Axis Bank, ICICI Bank, HDFC Bank, SBI, Punjab National Bank
Construction BGR Energy, Pratibha Industries, IRB Infra
Engineering BHEL, Greaves Cotton, Voltas, Diamond Power,
Cummins India, Gujarat Apollo
Information Technology Infosys, KPIT, TCS, NIIT Tech
Media HT Media, Sun TV
Metals & Mining Sesa Goa
NBFC LIC Housing Finance
Oil & Gas Cairn India
Other Midcaps Time Techno
Source: Kotak Securities - Private Client Research
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