Equity Strategy - January 2012:: CSEC Research

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Selling pressure intensifies in lower rung stocks

December saw the markets continuing its downward journey. The BSE Sensex closed lower by about 4% while the S&P CNX Nifty closed with a loss of 208 points at 4,624.3. Selling pressure intensified in lower rung stocks with the BSE Midcap and BSE Smallcap indices losing ~9% each. Volatility in the Sensex continued to remain at elevated levels, the index moved in a 1,900 points band as against more than 2,100 points in October and November. Volatility was also high in the the midcap and smallcap spaces.A surprise coordinated by the Federal Reserve and a few other central banks to keep credit flowing amid the worsening debt crisis in Europe helped fuel a rally in the equity markets. However, this rally was short lived as industrial production numbers spooked the markets.

Rate reversal on the cards

Lower yields in G-Secs and lower rates on overnight swaps indicate that debt markets are discounting peaking of interest rates. With food inflation moderating, growth is likely to take centre stage in the foreseeable future.  After two fiscals of strong growth, the current fiscal (FY12) has been a challenging one. September results were below expectations, while the sales growth along expected lines. Foreign exchange impact took center stage in the September quarter. Frontline IT stocks (Infosys, TCS and Wipro) have gone though earnings upgrades in the recent weeks, while Bharthi Airtel, Reliance and ONGC have been downgraded.  At 15,800, the Sensex is trading at ~15X FY13 earnings estimates. The weakened rupee and upgrades are likely to augur well for frontline IT stocks. Lower commodity prices are likely to have positive impact on FMCG stocks. Stocks in this space, however, have gone through only a moderate correction. Investors would be better off sticking to large and midcap stocks in the FMCG space. Considering risk aversion in the debt markets; stocks with high-leverage, typically infrastructure, shipping and real estate need to be given a go-by. Bogged by asset quality concerns and capital adequacy concerns under Basell III the financial space has gone through a sharp correction. These appear to be overdone, at current levels midcap and large cap banking stocks appear attractive.

Regards, 

CSEC  Research