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India Strategy
India: Sell in May and go away?
Headwinds likely to lead to tactical market correction
The Indian market has rallied 9% since the presentation of the budget in end-Feb,
led by sharp FII inflows of $3.2bn. We expect the markets to correct back to the
18,000 index levels over next couple of months, as the markets face 3 headwinds in
May: (a) inflation will increase close to 10% as the Government hikes prices of
petroleum products once the assembly polls are over in May, (b) Interest rates are
likely to increase: we expect RBI to hike in the May policy and hike by 100 bps by
October, and (c) the results in May will likely disappoint and should lead to earnings
downgrades – we expect FY12 Sensex EPS to fall 3-5% over next 6 months.
#1: No respite from inflationary pressure
Inflation surprised, at 9%, in March 2011. However, the worrying news for the
market is that inflationary pressures will mount over next few weeks, as the
Government hikes oil prices post the assembly elections. A 5% increase in prices
of petrol, diesel, cooking gas and kerosene will lead to a 40 bps increase in
inflation. Our economist believes inflation is already understated by 100 bps, since
some of the increases in crude petroleum products, cotton and chemicals are not
yet factored in the current data (See Report).
#2: RBI to hike interest rates 100 bps over next 6 months
Given inflationary worries, a hike in interest rates by RBI in their May 3rd meeting
appears almost inevitable, with fears now of a possible 50 bps move. While we
expect a 25 bps increase on May 3rd, we think RBI will have a series of 25 bps
increases over next 6 months, aggregating 100 bps. Banks, too, will raise lending
rates 75 bps. This would be negative both for the economy and the markets.
#3: Earnings downgrades to continue
Our Sensex EPS is down 3% since the beginning of the year. We expect further
downgrades over next 6 weeks, as earnings continue to disappoint consensus.
We think margin pressure, due to (a) commodity prices, (b) labor costs, and (c)
interest rate increases, is not yet adequately factored into analyst estimates. Our
view is that FY12 EPS is likely to be closer to Rs1200-1220 vs. current bottom-up
estimates of Rs1262.
#4: Our trading rule signals sell in Emerging Markets
A sell signal has been triggered for Emerging Markets by our trading rule, based
on flows. Since 2007, this rule has signaled a sell 10 times and has been
directionally right 7 times. On average, EMs has corrected 3.4% over 4 weeks
subsequent to the sell signal being triggered.
TOP BUYS: HCL Tech, BHEL, SBI
T OP SELLS: Bajaj Auto, Ambuja, SAIL
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
India: Sell in May and go away?
Headwinds likely to lead to tactical market correction
The Indian market has rallied 9% since the presentation of the budget in end-Feb,
led by sharp FII inflows of $3.2bn. We expect the markets to correct back to the
18,000 index levels over next couple of months, as the markets face 3 headwinds in
May: (a) inflation will increase close to 10% as the Government hikes prices of
petroleum products once the assembly polls are over in May, (b) Interest rates are
likely to increase: we expect RBI to hike in the May policy and hike by 100 bps by
October, and (c) the results in May will likely disappoint and should lead to earnings
downgrades – we expect FY12 Sensex EPS to fall 3-5% over next 6 months.
#1: No respite from inflationary pressure
Inflation surprised, at 9%, in March 2011. However, the worrying news for the
market is that inflationary pressures will mount over next few weeks, as the
Government hikes oil prices post the assembly elections. A 5% increase in prices
of petrol, diesel, cooking gas and kerosene will lead to a 40 bps increase in
inflation. Our economist believes inflation is already understated by 100 bps, since
some of the increases in crude petroleum products, cotton and chemicals are not
yet factored in the current data (See Report).
#2: RBI to hike interest rates 100 bps over next 6 months
Given inflationary worries, a hike in interest rates by RBI in their May 3rd meeting
appears almost inevitable, with fears now of a possible 50 bps move. While we
expect a 25 bps increase on May 3rd, we think RBI will have a series of 25 bps
increases over next 6 months, aggregating 100 bps. Banks, too, will raise lending
rates 75 bps. This would be negative both for the economy and the markets.
#3: Earnings downgrades to continue
Our Sensex EPS is down 3% since the beginning of the year. We expect further
downgrades over next 6 weeks, as earnings continue to disappoint consensus.
We think margin pressure, due to (a) commodity prices, (b) labor costs, and (c)
interest rate increases, is not yet adequately factored into analyst estimates. Our
view is that FY12 EPS is likely to be closer to Rs1200-1220 vs. current bottom-up
estimates of Rs1262.
#4: Our trading rule signals sell in Emerging Markets
A sell signal has been triggered for Emerging Markets by our trading rule, based
on flows. Since 2007, this rule has signaled a sell 10 times and has been
directionally right 7 times. On average, EMs has corrected 3.4% over 4 weeks
subsequent to the sell signal being triggered.
TOP BUYS: HCL Tech, BHEL, SBI
T OP SELLS: Bajaj Auto, Ambuja, SAIL
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