Indian Equity to be Best Asset Class in 2012: Escorts Mutual Fund

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Review for 2011

CY11 has been the second worst year after 2008 in the history of Indian Markets with nifty falling in rupee and USD terms by 25% and 44% respectively. The low rung stock witnessed heavy selling with BSE mid cap and BSE small cap falling by 34% and 42% respectively. The steep fall in market has been a big blow for FII’s portfolio and they remained net sellers of Rs. 2889 crores of CY11. The key challenges which led to massive underperformance were mix of international factors like EU financial crisis, global shifting of investment risk, slower than expected global growth etc and domestic factors like lack of reforms, sluggish demand, high inflation and interest rates, slowing capex and mounting currency risk.

Outlook for 2012

We expect 2012 to be different than 2011 as global factors matter less and domestic factors will become a key market driver (India’s correlation with global markets to weaken). On Domestic front, we expect key themes in play would be Reforms which should move forward post election in March, allowing foreign national to invest directly in stock market would help to meet the current account deficit woes and deflationary outcome from EU to help ease commodity pressure.   On international front, US would continue to be on extended deleveraging cycle in spite of positive economic indicators. In EU, ECB continue to make efforts to ease the liquidity situation of European Banks but going forward Investors should remain cautious in first half of 2012 as European countries have a combined EUR 1.1 trillion of government debt maturing in 2012.  The Indian Market is trading at Market capitalization/ GDP of 50% today which had reached 160% in early 2008. The corporate profitability has been depressed due to cost pressure and rising interest rate which we expect to reverse in next 18 months due to impending monetary easing.  On Valuation, the broader markets are today nearing historic lows and overall market is trading at attractive valuation. We suggest to invest in Indian equities at this stage as markets has taken into price most of the negatives and market psychology points to extreme pessimism which indicates for nearing bottom formation. 

Regards,
Archit Singhal
Fund Manager- Equity
Escorts Mutual Fund