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The IST Report
2011: lost in chaos
A year marked by dwindling hope and sense of resignation
2011 began with the hope of “muddle through” and is ending with a resignation to
“it’s so bad, it’s almost good”.
The year though will be remembered as a watershed year for many reasons:
The wide spread social unrest that will likely leave some indelible marks on
the global canvass. Many countries, e.g., Tunisia, Egypt, Libya, Syria,
Yemen, etc. witnessed strong demand for a change in the extant political
structures; whereas many other in the west saw people coming to street
seeking significant structural changes in the functioning of financial markets.
India also witnessed a popular public moment against corruption and
accountability gap.
The public debt crisis in EU assumed threatening proportions that could
impact the global fiscal policy framework in the decades to come.
A major nuclear accident in Japan triggered a debate on desirability of
nuclear energy in the global energy mix.
Enduring Japanese earthquake, US credit rating downgrade, a full blown
European sovereign debt crisis, and unrest in MENA, the asset class returns
in 2011 have been surprisingly resilient. Bond returns up 5%, commodities
flat, and global equities have lost only 6%.
Underperformance of BRIC markets. One of the most notable features of
global equities in 2011 was stark underperformance of BRIC, especially India
and China, still the two fastest growing economies.
Emerging markets underperformed the developed markets and US.
The big story of 2011 was the de-rating of equity multiples, making equity
valuations cheap as compared to the historical averages.
Indian equities: down and out of favor
Led by deteriorating macro, slipping growth and consequent earnings downgrade
and negative publicity generated due to frequent scams and revelation of
accountability gaps in many instances, Indian equities find place amongst the
worst performers globally.
Domestic consumption largely saved the day for the economy, as the investment
cycle descended sharply. The trend was reflected in the sector performance
w here consumers substantially outperformed.
2011: key trends
2011 might be remembered as one of the most chaotic years of recent times – a
year when global economic troubles began to reflect in the wider socio-political
arena. The unprecedented global unity demonstrated during 2008 crisis was not
found effective. The compulsions of domestic constituencies appeared to
dominate the political agenda for most part of the year.
Most developed economies struggled to avoid another recession. The economic
problems were further compounded by the full blown sovereign debt crisis in Euro
zone, a major natural disaster in Japan, and widespread unrest in MENA region
causing supply disruptions and consequent higher energy prices.
The following were some of the key trends observed during the year which may
be considered important from Indian market viewpoint.
In one of the worst years in past three decades, Indian equities posted ~18%
(YTD) negative return, erasing the entire ~17% gain made in 2010. In fact, it
was not only India, BRIC as a group has underperformed the world (even
emerging market). It raises some doubts whether BRIC as a theme is out of
favor?
Large cap defensives, largely domestic consumption, outperformed the
midcap and small cap.
FII net flows were one of the lowest in many years, but gross turnover was
largely in line with 2010, a year which saw highest FII net flows in history.
This could imply two things – major sectoral rotation and higher trading
activity of foreign investors.
Alternative to equity – e.g., bonds, gold and cash yielded good returns
through the year. Given the BofAML latest forecasts this trend may extend to
1H2012 at the least.
The margin pressure on Indian corporate increased further. Sensex EBIDTA
margins in 2QFY12 were at a seven year low. High wage, capital and RM
material prices have eaten into the margins at a time when pricing power is
constrained by slowing demand. We expect earnings downgrades will
continue with FY13 being more vulnerable.
The domestic demand has so far been resilient and has cushioned Indian
economy against global shocks. Though in past couple of months there have
been signs of consumer confidence also slipping.
The credit growth slipped below 20%.
INR has weakened vs. USD significantly in past few months. Our Fx strategy
team sees INR further slipping to 55/$ level by March 2012, before
recovering to 49/$ level by end of 2012.
The big story of 2011 was the de-rating of equity multiples, making global
equity valuations cheap as compared to the historical averages.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The IST Report
2011: lost in chaos
A year marked by dwindling hope and sense of resignation
2011 began with the hope of “muddle through” and is ending with a resignation to
“it’s so bad, it’s almost good”.
The year though will be remembered as a watershed year for many reasons:
The wide spread social unrest that will likely leave some indelible marks on
the global canvass. Many countries, e.g., Tunisia, Egypt, Libya, Syria,
Yemen, etc. witnessed strong demand for a change in the extant political
structures; whereas many other in the west saw people coming to street
seeking significant structural changes in the functioning of financial markets.
India also witnessed a popular public moment against corruption and
accountability gap.
The public debt crisis in EU assumed threatening proportions that could
impact the global fiscal policy framework in the decades to come.
A major nuclear accident in Japan triggered a debate on desirability of
nuclear energy in the global energy mix.
Enduring Japanese earthquake, US credit rating downgrade, a full blown
European sovereign debt crisis, and unrest in MENA, the asset class returns
in 2011 have been surprisingly resilient. Bond returns up 5%, commodities
flat, and global equities have lost only 6%.
Underperformance of BRIC markets. One of the most notable features of
global equities in 2011 was stark underperformance of BRIC, especially India
and China, still the two fastest growing economies.
Emerging markets underperformed the developed markets and US.
The big story of 2011 was the de-rating of equity multiples, making equity
valuations cheap as compared to the historical averages.
Indian equities: down and out of favor
Led by deteriorating macro, slipping growth and consequent earnings downgrade
and negative publicity generated due to frequent scams and revelation of
accountability gaps in many instances, Indian equities find place amongst the
worst performers globally.
Domestic consumption largely saved the day for the economy, as the investment
cycle descended sharply. The trend was reflected in the sector performance
w here consumers substantially outperformed.
2011: key trends
2011 might be remembered as one of the most chaotic years of recent times – a
year when global economic troubles began to reflect in the wider socio-political
arena. The unprecedented global unity demonstrated during 2008 crisis was not
found effective. The compulsions of domestic constituencies appeared to
dominate the political agenda for most part of the year.
Most developed economies struggled to avoid another recession. The economic
problems were further compounded by the full blown sovereign debt crisis in Euro
zone, a major natural disaster in Japan, and widespread unrest in MENA region
causing supply disruptions and consequent higher energy prices.
The following were some of the key trends observed during the year which may
be considered important from Indian market viewpoint.
In one of the worst years in past three decades, Indian equities posted ~18%
(YTD) negative return, erasing the entire ~17% gain made in 2010. In fact, it
was not only India, BRIC as a group has underperformed the world (even
emerging market). It raises some doubts whether BRIC as a theme is out of
favor?
Large cap defensives, largely domestic consumption, outperformed the
midcap and small cap.
FII net flows were one of the lowest in many years, but gross turnover was
largely in line with 2010, a year which saw highest FII net flows in history.
This could imply two things – major sectoral rotation and higher trading
activity of foreign investors.
Alternative to equity – e.g., bonds, gold and cash yielded good returns
through the year. Given the BofAML latest forecasts this trend may extend to
1H2012 at the least.
The margin pressure on Indian corporate increased further. Sensex EBIDTA
margins in 2QFY12 were at a seven year low. High wage, capital and RM
material prices have eaten into the margins at a time when pricing power is
constrained by slowing demand. We expect earnings downgrades will
continue with FY13 being more vulnerable.
The domestic demand has so far been resilient and has cushioned Indian
economy against global shocks. Though in past couple of months there have
been signs of consumer confidence also slipping.
The credit growth slipped below 20%.
INR has weakened vs. USD significantly in past few months. Our Fx strategy
team sees INR further slipping to 55/$ level by March 2012, before
recovering to 49/$ level by end of 2012.
The big story of 2011 was the de-rating of equity multiples, making global
equity valuations cheap as compared to the historical averages.
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