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Stratoscope
India Corporate Earnings - Rising Global linkages
Investors attribute the increasing correlation between Indian and
global equities to the dependence on external capital…The economy
is perceived to be relatively insulated from the global factors, as the net
contribution of international trade to GDP is insignificant. Also,
international trade as a percentage of GDP has been stagnating over the
last few years, in the aftermath of the global financial crisis.
…But another important, but less appreciated variable, could be
strenghtening the correlation as well. Corporate India’s
international ambitions and operations have grown rapidly over this
phase. We estimate that currently about 43% of the revenues and 40%
of the profits of the MSCI India (ex Energy) are directly influenced by
global factors. The trend is expected to sustain and increase.
Sensex consolidating over the last 2 months, in line with
expectations. December has typically been a good month for Indian
equities (average return 4%) and we would not be surprised to see a
minor year end rally. But expect consolidation to continue early into
2011 due to sustained high levels of primary market activity and tight
local liquidity. We however remain positive over a 12 month horizon
and target returns of 15-20%, driven mainly by the earnings growth
forecast.
Portfolio stance. Tactical downgrade of Energy from Overweight to
Neutral, due to the recent surge in global crude oil prices and lack of
clarity on subsidy sharing. State owned oil companies are vulnerable.
Adding NTPC to the portfolio, following sharp underperformance. Also
recent change in power sector regulation favors generation companies
with existing PPAs that run through over the medium term.
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