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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bottom-line: In the current volatile environment, investors have started extrapolating the current context
and speculating about the repeat of the doomsday scenario of 2008.
We assess that the current environment, though challenging is quite different and most variables now are
far superior in comparison to those prevailing at that time. While near-term challenges for the economy
and Indian equities will test our patience, is it probably a great opportunity for long-term Indian equity
investors? We give our perspective.
Over the last few days, Indian market has materially sold off owing to the massive rise in global risk
aversion. Globally, key indices have declined over 10% in less than two weeks due to macro data
disappointments from all over the World, especially the US. The latest announcement of US debt rating
cut by agency S&P has also added to the concern about the direction of the global equity markets in
particular.
Indian equities have, in fact, been facing headwinds since the beginning of this year owing to “domestic”
macroeconomic concerns. The news flow on the political front has also not helped matters. The recent
global uncertainty has added to the market’s woes. The US downgrade has probably acted as the last
straw to break the back of the Indian investor’s confidence. Not surprisingly, a section of the concerned
market has started talking about a double-dip and whether there would be a repeat of year 2008.
While, we acknowledge that the investment climate remains challenging, we think the concerns on repeat
of 2008 kind of sell is a bugbear. We assess that the current market backdrop is starkly different from the
doomsday scenario of 2008. Moreover, post the global financial crisis, the relative resilience of many EM
(emerging markets) economies, in general, and India, in particular, has led to increased investors’ faith in
these economies/markets. We explore these individual variables and highlight that the fundamentals are
far superior, while animal spirits are running at rock bottom levels.
Global economy and markets: The 2008 financial crisis was centered around US banks and corporate.
The fundamentals of these banks and corporates have tremendously improved in the last four years.
Moreover, it’s a well established fact that owing to their superior fundamentals, EM (emerging markets)
economies’ growth is far more sustainable as compared to their DE (developed economies) counterparts.
In 2007-08, the engines of global growth were DM (developed markets), while in the last 4 years, EM
have emerged as the biggest source of growth. Share of EM in global GDP has gone up from 28% in
2007 to 35% now. In 2011, EMs are expected to grow by 6% in 2011 while DM to grow by 1.5%. Though
not completely immune, the world economy is far less vulnerable to US and other DMs growth scare.
Impact of US credit rating downgrade: While, in near term, this has resulted in heightened risk aversion,
this is a reminder of the unsustainable overleveraged situation of the Western economies. The silver
lining is that global equities are trading at a very reasonable valuations (MSCI World index at below 11x
PE ratio) and from relative valuation perspective, equities are looking better than debt as an asset class.
From the medium term perspective, such events clearly strengthen the case of EMs assets (India, China).
They have the potential, over a period of time, to hasten the fund flow into faster growing, more resilient
and domestic oriented economies like India.
Sharp corrections and a softer pricing outlook for commodities and oil can be an additional long-term
positive for India. The monstrous concerns of inflation and high interest rates might also be a thing of the
past.
Indian economy: Indian macro variables have remained challenging for the last 3-4 quarters. The
expectations from Indian economy are far more muted now as compared to FY07-08. We might have
already seen the worst of the inflationary pressure and consensus expects below 8% GDP growth in India
in FY12. Over the last few quarters, market has only focused on few negatives on Indian economy, while
ignoring the robust expansion of the domestic economy. Since FY08, domestic economy has grown by
65%, while India’s market capitalization has gone down by 20%. India’s market cap to GDP ratio has
come down from 145% in FY08 to less than 80% now. Falling oil and commodity prices bodes well for the
economy and the equity markets.
Earnings and valuations: Earnings growth expectations are far more reasonable than what it was in
2007-08. Similarly, valuations are far more reasonable. The overall health of corporate India is better than
what it was in 2008. Indian market is trading at 13.7x 1 yr fwd P/E ratio as compared to 24x in FY07-08.
India’s broad market is far cheaper. Indian small cap index is trading at ~7x 1 yr fwd P/E versus over 13x
in FY07-08. Indeed, Indian market is trading at well below average multiples as compared to its own
history as well as versus its peers.
Flows and positioning: Unlike 2007-08 when foreign investors were extremely gung-ho on Indian
market (decoupling argument), this time the level of excitement is limited. While, flows into equities in the
last two years have remained satisfactory, year till date flows in 2011 has remained subdued suggesting
lesser exuberance of FIIs towards Indian equities.
Similarly, exuberance from the domestic investors both retail and institutions is now starkly in contrast
with 2008 levels. Indian institutions have received virtually negative inflows over the last 2 years and
therefore it can be deduced that the animal spirits among the Indian investors are running at low levels.
Other indicators like Open interest (OI), turnover (volumes), leveraged positions etc, corroborates the fact
that the exuberance in Indian equities is far from being called excessive.
To conclude, we acknowledge that the headwinds to Indian equities have been significant over the last
few months and that the uncertain global macro environment has added to the volatility. However, we
assess the fears of massive selloff, reminiscence of 2007-08 global subprime crisis are overdone. On
comparison, the variables at around the sell-off of 2008 were different and far more menacing than they
are now. While currently, certain section of the market is worried about repeat of 2008, we believe as
investors one should avoid panic and rather look at the current adverse environment as an opportunity.
While the market has been pricing a lot of those concerns, many of the headwinds which have been
troubling our market (domestic inflation and interest rates) are likely peaking now. From an investor
standpoint, we think notwithstanding the events/risks in the next few months, if one invest in equities now,
in the ensuing period one can expect relatively better returns over the following 12- 18 months.
In the following page, we provide an exhaustive snapshot of key variables to highlight the difference in
fundamentals and risks prevailing at around 2008 crisis versus now. Please have a look.
Common Source: Bloomberg
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bottom-line: In the current volatile environment, investors have started extrapolating the current context
and speculating about the repeat of the doomsday scenario of 2008.
We assess that the current environment, though challenging is quite different and most variables now are
far superior in comparison to those prevailing at that time. While near-term challenges for the economy
and Indian equities will test our patience, is it probably a great opportunity for long-term Indian equity
investors? We give our perspective.
Over the last few days, Indian market has materially sold off owing to the massive rise in global risk
aversion. Globally, key indices have declined over 10% in less than two weeks due to macro data
disappointments from all over the World, especially the US. The latest announcement of US debt rating
cut by agency S&P has also added to the concern about the direction of the global equity markets in
particular.
Indian equities have, in fact, been facing headwinds since the beginning of this year owing to “domestic”
macroeconomic concerns. The news flow on the political front has also not helped matters. The recent
global uncertainty has added to the market’s woes. The US downgrade has probably acted as the last
straw to break the back of the Indian investor’s confidence. Not surprisingly, a section of the concerned
market has started talking about a double-dip and whether there would be a repeat of year 2008.
While, we acknowledge that the investment climate remains challenging, we think the concerns on repeat
of 2008 kind of sell is a bugbear. We assess that the current market backdrop is starkly different from the
doomsday scenario of 2008. Moreover, post the global financial crisis, the relative resilience of many EM
(emerging markets) economies, in general, and India, in particular, has led to increased investors’ faith in
these economies/markets. We explore these individual variables and highlight that the fundamentals are
far superior, while animal spirits are running at rock bottom levels.
Global economy and markets: The 2008 financial crisis was centered around US banks and corporate.
The fundamentals of these banks and corporates have tremendously improved in the last four years.
Moreover, it’s a well established fact that owing to their superior fundamentals, EM (emerging markets)
economies’ growth is far more sustainable as compared to their DE (developed economies) counterparts.
In 2007-08, the engines of global growth were DM (developed markets), while in the last 4 years, EM
have emerged as the biggest source of growth. Share of EM in global GDP has gone up from 28% in
2007 to 35% now. In 2011, EMs are expected to grow by 6% in 2011 while DM to grow by 1.5%. Though
not completely immune, the world economy is far less vulnerable to US and other DMs growth scare.
Impact of US credit rating downgrade: While, in near term, this has resulted in heightened risk aversion,
this is a reminder of the unsustainable overleveraged situation of the Western economies. The silver
lining is that global equities are trading at a very reasonable valuations (MSCI World index at below 11x
PE ratio) and from relative valuation perspective, equities are looking better than debt as an asset class.
From the medium term perspective, such events clearly strengthen the case of EMs assets (India, China).
They have the potential, over a period of time, to hasten the fund flow into faster growing, more resilient
and domestic oriented economies like India.
Sharp corrections and a softer pricing outlook for commodities and oil can be an additional long-term
positive for India. The monstrous concerns of inflation and high interest rates might also be a thing of the
past.
Indian economy: Indian macro variables have remained challenging for the last 3-4 quarters. The
expectations from Indian economy are far more muted now as compared to FY07-08. We might have
already seen the worst of the inflationary pressure and consensus expects below 8% GDP growth in India
in FY12. Over the last few quarters, market has only focused on few negatives on Indian economy, while
ignoring the robust expansion of the domestic economy. Since FY08, domestic economy has grown by
65%, while India’s market capitalization has gone down by 20%. India’s market cap to GDP ratio has
come down from 145% in FY08 to less than 80% now. Falling oil and commodity prices bodes well for the
economy and the equity markets.
Earnings and valuations: Earnings growth expectations are far more reasonable than what it was in
2007-08. Similarly, valuations are far more reasonable. The overall health of corporate India is better than
what it was in 2008. Indian market is trading at 13.7x 1 yr fwd P/E ratio as compared to 24x in FY07-08.
India’s broad market is far cheaper. Indian small cap index is trading at ~7x 1 yr fwd P/E versus over 13x
in FY07-08. Indeed, Indian market is trading at well below average multiples as compared to its own
history as well as versus its peers.
Flows and positioning: Unlike 2007-08 when foreign investors were extremely gung-ho on Indian
market (decoupling argument), this time the level of excitement is limited. While, flows into equities in the
last two years have remained satisfactory, year till date flows in 2011 has remained subdued suggesting
lesser exuberance of FIIs towards Indian equities.
Similarly, exuberance from the domestic investors both retail and institutions is now starkly in contrast
with 2008 levels. Indian institutions have received virtually negative inflows over the last 2 years and
therefore it can be deduced that the animal spirits among the Indian investors are running at low levels.
Other indicators like Open interest (OI), turnover (volumes), leveraged positions etc, corroborates the fact
that the exuberance in Indian equities is far from being called excessive.
To conclude, we acknowledge that the headwinds to Indian equities have been significant over the last
few months and that the uncertain global macro environment has added to the volatility. However, we
assess the fears of massive selloff, reminiscence of 2007-08 global subprime crisis are overdone. On
comparison, the variables at around the sell-off of 2008 were different and far more menacing than they
are now. While currently, certain section of the market is worried about repeat of 2008, we believe as
investors one should avoid panic and rather look at the current adverse environment as an opportunity.
While the market has been pricing a lot of those concerns, many of the headwinds which have been
troubling our market (domestic inflation and interest rates) are likely peaking now. From an investor
standpoint, we think notwithstanding the events/risks in the next few months, if one invest in equities now,
in the ensuing period one can expect relatively better returns over the following 12- 18 months.
In the following page, we provide an exhaustive snapshot of key variables to highlight the difference in
fundamentals and risks prevailing at around 2008 crisis versus now. Please have a look.
Common Source: Bloomberg
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