May witnessed risk-off trade globally, with equities, commodities, EM currencies, all falling sharply and bond yields in US and Germany hitting record lows. Synchronized downturn in global economy and escalation of European debt crisis were the key factors shaping the market performance. In India, equities slipped ~6%, led by lackluster portfolio flows. Meanwhile, earnings season was not so inspiring. While earnings growth was ahead of expectations, it was largely on the back of a few stocks. Further, revenue growth is slowing and more importantly, the downgrade cycle seems to be gaining pace, after a brief lull.
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Global economy entering a synchronized slowdown
Past 2-3 months data confirms a synchronized global slowdown. Indeed, decline in growth of global money supply (M1) is very much on the lines of Dec 2008. At the same time, the latest BIS data suggests that cross-border loans are being retrenched rapidly, led by EU banks. These trends foreshadow substantial weakness in global economy, which will certainly hit growth prospects of Indian economy.
RBI likely to cut rates by at least 75bps in rest of FY13
RBI has kept monetary conditions too tight for too long, in our view. While the economy has slipped far below its potential, real rates are still at historical highs (despite 50bps rate cut) and will continue to hurt activity for next 2-3 quarters. Indeed, we argue that high interest rates are turning counter-productive, impeding fiscal consolidation (via lower growth and hence tax revenues), worsening investment downturn and hindering inflation easing (by discouraging capacity creation). Accordingly, we expect RBI to support growth by cutting repo rate by 75-100bps in the rest of FY13.
CAD to narrow to 3.2-3.3% of GDP in FY13
India’s CAD breached 4% of GDP in Dec 2011, entering a vulnerable zone. However, key factors are falling into place that should help narrow CAD. First, the undervalued INR should boost exports and import-competing sectors. Second, softening commodities should lift India’s terms of trade, and third, a weak domestic demand must keep non-oil imports under check. Based on our calculation on above trends, CAD is set to narrow to 3.2-3.3% of GDP in FY13 vs ~4% in FY12.
Earnings: Surprise on upside, but driven by a few stocks
Earnings growth for the Sensex, at 21.8% YoY was well ahead of our expectation (6.4%). However, this does not enthuse us much, since it was driven by a few stocks. Meanwhile, revenue growth seems to be waning, pointing to weakening overall demand (Sensex at 19.4%, YoY vs 22% last 3 quarters average). More worryingly, after a brief lull, the downgrade cycle seems to be gaining pace with FY13 Sensex EPS estimates having been downgraded by 1.7% since the beginning of earnings season. For FY13E, the consensus Sensex EPS stands at INR1,280 (Edelweiss: INR1,276).
Regards,
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