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India Equity Strategy
2H11 Outlook: Buy India, Not the Mood
Sentiment is bad — India has been low on sentiment before; this time it’s a wide
combination of inflation, interest rates, government policy and action inertia, a capex
slump and downside risks to economic and earnings growth. Basically, it’s not hard to
see why India is one of the worst performing markets globally (-14.4% YTD).
Corporates are reading the macro, but riding the micro — Bottom up, the picture
appears rather different. Most corporates suggest a certain caution over the next 1-2
quarters, but they continue to plan, invest and position for a more robust, longer-term
outlook. Also, consumer demand remains relatively positive. Adjusting for the increase
in interest rates, we see earnings growth remaining decent at 18-19%.
Incremental macro pressures should ease – The macro problems – inflation, rates
and government inertia – are elevated and could have structural implications. Nor are
there enough signs to suggest a near-term reversal. However, we do not believe that
‘falling growth and higher rates’ go together. With slower growth now baked in, we
expect an easing in both demand-driven inflation and further rate pressures.
Valuations more supportive — While India is still not conspicuously cheap, we see
the potential for strong returns in 2HY2011, given: 1) earnings multiples are at a 15%
discount to long-term averages; 2) interest rates are already high; 3) commodity
price/inflation pressures should ease; 4) India’s growth differential vs. the developed
world could rise; 5) history suggests a strong 2H performance; 6) sentiment could be
boosted by macro/government action. We target a Sensex level of 21500 by Dec 2011.
Model Portfolio – Long Banks, Energy, Telecom, Pharma and Real Estate
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equity Strategy
2H11 Outlook: Buy India, Not the Mood
Sentiment is bad — India has been low on sentiment before; this time it’s a wide
combination of inflation, interest rates, government policy and action inertia, a capex
slump and downside risks to economic and earnings growth. Basically, it’s not hard to
see why India is one of the worst performing markets globally (-14.4% YTD).
Corporates are reading the macro, but riding the micro — Bottom up, the picture
appears rather different. Most corporates suggest a certain caution over the next 1-2
quarters, but they continue to plan, invest and position for a more robust, longer-term
outlook. Also, consumer demand remains relatively positive. Adjusting for the increase
in interest rates, we see earnings growth remaining decent at 18-19%.
Incremental macro pressures should ease – The macro problems – inflation, rates
and government inertia – are elevated and could have structural implications. Nor are
there enough signs to suggest a near-term reversal. However, we do not believe that
‘falling growth and higher rates’ go together. With slower growth now baked in, we
expect an easing in both demand-driven inflation and further rate pressures.
Valuations more supportive — While India is still not conspicuously cheap, we see
the potential for strong returns in 2HY2011, given: 1) earnings multiples are at a 15%
discount to long-term averages; 2) interest rates are already high; 3) commodity
price/inflation pressures should ease; 4) India’s growth differential vs. the developed
world could rise; 5) history suggests a strong 2H performance; 6) sentiment could be
boosted by macro/government action. We target a Sensex level of 21500 by Dec 2011.
Model Portfolio – Long Banks, Energy, Telecom, Pharma and Real Estate
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