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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
It is not 2008
„Expect no crash
The risk rally witnessed during March-April 2011 bears some stark resemblance
to 4Q2007, inasmuch as the market did defy strong macro headwinds, global
concerns and earnings pressure. There is, however, little evidence to suggest that
this could be followed by a crash like 2008-09, in our view. Unlike 2008, there are
no signs of panic amongst investors; no solvency concerns for large corporates
and banks; volatility is persistently low to moderate; technically markets are far
from overheated; and earnings growth, though slowing a tad, is far more visible.
10% market correction - a good buying opportunity
We have been arguing since the beginning of this year that around 18000 Sensex
level, the market would likely price in economic and earnings concern and any
substantial correction below this level would provide sufficient cushion for any
shock event. In our view, the correction that began end-April may likely extend
further and provide a good buying opportunity for traders as well as investors.
The triggers for further correction, in our view, would be (a) inflation rising close to
10% as the Government hikes prices of petroleum products once the assembly polls
are over on 13
th
May, (b) further hike in Interest rates – expect another 75bps repo
hike by October and (c) earnings downgrades as the results in May will likely
disappoint – we expect FY12 Sensex EPS to fall 3-5% over the next 6 months.
Policy makers focused on prices, at least for now
RBI in its recent statements has consistently emphasized the need for policy
intervention to address the “near term as well as structural imbalances to bring
down inflation on an enduring basis”. Though the stated policy objective is
maintained at balancing growth and inflation, we think the immediate policy
concerns are likely more focused on price control.
Globally earnings downgrades signal muted equity returns
The one-month Global Earnings Revision Ratio fell in April from 1.04 to 0.75, and
the three-month Ratio was also down, from 1.11 to 0.98. In the past (Jan-88 to
Mar-11) when the one-month Global Earnings Revision Ratio was between 0.70
and 0.80 and was falling the MSCI ACWI returns averaged just 1.0% in the
subsequent twelve months. By itself, the recent fall in the Ratio suggests equity
returns may be muted in the next year.
What to do?
In this environment of global uncertainty, rising rates, high inflation and fading
earnings and growth momentum, historically equities have not outperformed the
fixed income significantly. We therefore suggest a moderate asset allocation and
equities portfolio oriented towards large cap, and low beta stocks.
Expect no crash
Key message: A 2008-like crash in markets is highly unlikely, in our view. This
time, unlike 2008, there are no signs of panic amongst investors; no solvency
concerns for large corporates and banks; household leverage is well below 2007
level, and earnings growth, though slowing a tad, is far more visible; consumer
confidence is strong; political environment is more stable; and most of the
economic concerns have been well assimilated by the markets.
Strategy: Moderate risk, sufficient tactical cash, high quality and adequate hedge
Positive Themes: Large cap defensives, Global Indian, High yielding debt, Rural
consumption
Avoid: Leverage, small cap, high beta, rate sensitives
It is not 4Q2007
The risk rally in the past couple of months bears some stark resemblance to
4Q2007. The Indian equities gained over 10% post end February presentation of
Union budget for FY12, before giving away most of these gains in the past few
trading sessions. The counterintuitive market rally and subsequent fall has given
rise to doubts whether this 4Q2007-like trend in the market may eventually lead to
a 2008-like crash subsequently.
In our view, though the recent market trend may appear like 4Q2007, there are
some significant dissimilarities, e.g., bonds are not behaving like equities this
time; volatility continues to be persistently low; the market is not showing any
signs of overheating technically; Indian equities have underperformed the world
YTD; there is no indiscriminate selling across the world, and foreign flows are
nominal (~US$1bn YTD).
10% market correction - a good buying opportunity
We have been arguing since the beginning of this year that around 18000 Sensex
level, the market stands delicately in balance with economic and earnings
concerns priced in.
However, at this level the market does not have any cushion for a shock event or
negative surprise, in our view. A ~10% or more correction from current levels
would provide critical cushion for weathering any shock event. In our view, the
correction that began end-April may likely extend further and provide a good
opportunity for traders as well as investors.
Inflation primary concern for now
RBI in its recent policy statement made it amply clear that inflation is the primary
policy concern for now. The outlined monetary policy objectives are to:
„ maintain an interest rate environment that moderates inflation and anchors
inflation expectations;
„ foster an environment of price stability that is conducive to sustaining growth
in the medium term coupled with financial stability; and
„ manage liquidity to ensure that it remains broadly in balance, with neither a
large surplus diluting monetary transmission nor a large deficit choking off
fund flows.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
It is not 2008
„Expect no crash
The risk rally witnessed during March-April 2011 bears some stark resemblance
to 4Q2007, inasmuch as the market did defy strong macro headwinds, global
concerns and earnings pressure. There is, however, little evidence to suggest that
this could be followed by a crash like 2008-09, in our view. Unlike 2008, there are
no signs of panic amongst investors; no solvency concerns for large corporates
and banks; volatility is persistently low to moderate; technically markets are far
from overheated; and earnings growth, though slowing a tad, is far more visible.
10% market correction - a good buying opportunity
We have been arguing since the beginning of this year that around 18000 Sensex
level, the market would likely price in economic and earnings concern and any
substantial correction below this level would provide sufficient cushion for any
shock event. In our view, the correction that began end-April may likely extend
further and provide a good buying opportunity for traders as well as investors.
The triggers for further correction, in our view, would be (a) inflation rising close to
10% as the Government hikes prices of petroleum products once the assembly polls
are over on 13
th
May, (b) further hike in Interest rates – expect another 75bps repo
hike by October and (c) earnings downgrades as the results in May will likely
disappoint – we expect FY12 Sensex EPS to fall 3-5% over the next 6 months.
Policy makers focused on prices, at least for now
RBI in its recent statements has consistently emphasized the need for policy
intervention to address the “near term as well as structural imbalances to bring
down inflation on an enduring basis”. Though the stated policy objective is
maintained at balancing growth and inflation, we think the immediate policy
concerns are likely more focused on price control.
Globally earnings downgrades signal muted equity returns
The one-month Global Earnings Revision Ratio fell in April from 1.04 to 0.75, and
the three-month Ratio was also down, from 1.11 to 0.98. In the past (Jan-88 to
Mar-11) when the one-month Global Earnings Revision Ratio was between 0.70
and 0.80 and was falling the MSCI ACWI returns averaged just 1.0% in the
subsequent twelve months. By itself, the recent fall in the Ratio suggests equity
returns may be muted in the next year.
What to do?
In this environment of global uncertainty, rising rates, high inflation and fading
earnings and growth momentum, historically equities have not outperformed the
fixed income significantly. We therefore suggest a moderate asset allocation and
equities portfolio oriented towards large cap, and low beta stocks.
Expect no crash
Key message: A 2008-like crash in markets is highly unlikely, in our view. This
time, unlike 2008, there are no signs of panic amongst investors; no solvency
concerns for large corporates and banks; household leverage is well below 2007
level, and earnings growth, though slowing a tad, is far more visible; consumer
confidence is strong; political environment is more stable; and most of the
economic concerns have been well assimilated by the markets.
Strategy: Moderate risk, sufficient tactical cash, high quality and adequate hedge
Positive Themes: Large cap defensives, Global Indian, High yielding debt, Rural
consumption
Avoid: Leverage, small cap, high beta, rate sensitives
It is not 4Q2007
The risk rally in the past couple of months bears some stark resemblance to
4Q2007. The Indian equities gained over 10% post end February presentation of
Union budget for FY12, before giving away most of these gains in the past few
trading sessions. The counterintuitive market rally and subsequent fall has given
rise to doubts whether this 4Q2007-like trend in the market may eventually lead to
a 2008-like crash subsequently.
In our view, though the recent market trend may appear like 4Q2007, there are
some significant dissimilarities, e.g., bonds are not behaving like equities this
time; volatility continues to be persistently low; the market is not showing any
signs of overheating technically; Indian equities have underperformed the world
YTD; there is no indiscriminate selling across the world, and foreign flows are
nominal (~US$1bn YTD).
10% market correction - a good buying opportunity
We have been arguing since the beginning of this year that around 18000 Sensex
level, the market stands delicately in balance with economic and earnings
concerns priced in.
However, at this level the market does not have any cushion for a shock event or
negative surprise, in our view. A ~10% or more correction from current levels
would provide critical cushion for weathering any shock event. In our view, the
correction that began end-April may likely extend further and provide a good
opportunity for traders as well as investors.
Inflation primary concern for now
RBI in its recent policy statement made it amply clear that inflation is the primary
policy concern for now. The outlined monetary policy objectives are to:
„ maintain an interest rate environment that moderates inflation and anchors
inflation expectations;
„ foster an environment of price stability that is conducive to sustaining growth
in the medium term coupled with financial stability; and
„ manage liquidity to ensure that it remains broadly in balance, with neither a
large surplus diluting monetary transmission nor a large deficit choking off
fund flows.
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