Deepening Euro zone crisis resonated sharply across the risk asset spectrum, keeping sentiments for equities subdued in July. However, ECB’s stated willingness to make outright bond purchases is a significant positive step, in our view, although uncertainty persists with regards to the probable timing of action. Meanwhile, India was an underperformer in July, but retained its pole position as one of the top performing markets YTD. Furthermore, despite sector-wise pain points, by and large, Q1FY13 earnings have so far surpassed expectations. The big concern emerging is the tardy pace of monsoon, with rain deficit for the season so far standing at 19% below normal. This certainly poses downside risks to growth and upside risks to inflation.
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ECB: Significant commitment, needs to be backed by action
In its much awaited monetary policy meeting, the ECB has expressed willingness to make outright purchases of government bonds, stating that it, “may undertake outright open market operations of a size adequate to reach its objective” and also undertake some unconventional policy measures. This, in our view, reflects the apex bank’s increasing aggression and hence we perceive it as a positive move. However, timing of the action is still uncertain, given the fact that troubled countries (e.g., Spain) need to approach EFSF/ESM for formal assistance before the ECB can act. Once such pre-conditions are met, the presence of EFSF/ESM and ECB in European bond markets can be a significant positive.
Indian economy: Deficient monsoon casts a shadow on inflation
The progress of monsoon remains poor, with rainfall deficit standing at 19% below normal during June 1-July 31. Besides, with the lingering risk of El Nino, the IMD has downgraded its full season rainfall projection from ‘normal’ to ‘deficient’. As regards sowing, pulses, rice and coarse cereals remain below par, although oilseeds and cotton have picked up. Nonetheless, with rainfall expected to be lackluster during August-September as well, we now expect much higher average inflation of ~7.8% (YoY) in FY13 compared to our earlier assessment of 7.2%.
Earnings: Surpass expectations, no downgrades
Despite the underperformance in July, the Sensex remains amongst the top performing markets for the year so far. On the earnings front, there are some sector-wise pain points (asset quality in PSU banks, below par guidance in IT and poor ordering within the BTG equipment space), but by and large, numbers have so far been above expectations. Also, the silver lining is that this has been one of the few quarters in recent times where there have been no downgrades to consensus Sensex EPS estimates, which now stands at INR1,280 for FY13E (INR1,278 before earnings season).
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