Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
April – May: an inflection point for Indian equity market?
Barring oil prices and any systemic risk arising from the fallout of the nuclear
accident in Japan, we believe that the sharp underperformance of the Indian
equity market (YTD Sensex has underperformed MSCI Asia by 700bps) may be
bottoming. We see the markets reaching an inflection point in April-May and a
directional shift upwards setting in, during 2H2011. Apr-May are likely to be
important for the Indian equity markets on account of (1) release of Indian
monsoon forecast by Meteorological Department (2) election results of five Indian
states which will go to the polls in April (3) Group of Ministers Meeting to discuss
contentious issues on coal mining and environmental approvals (4) FOMC and
ECB meetings (given the recent unanticipated increase in inflation in DM).
Inflation risk still elevated but risk of monetary policy error may be overdone
Elevated inflation and more importantly, fears of an overtly aggressive monetary
policy response to curb inflation have been amongst the most significant worries
for the Indian equity markets, since January. We believe that while inflation is
expected to trend down only gradually, the risk of a policy error – the main worry
for the markets – appears to be receding. The RBI’s response has been calibrated
and there have been no knee jerk responses to suggest that the RBI will move into
a policy overdrive that would impact economic momentum, like it did in the mid
nineties. The consensus expectation of an additional 50 – 75 bps increase in rates
from here is baked in the cake and hence largely discounted by equity markets.
High likelihood of normal Indian monsoon in 2011
Based on meteorological trends and other weather factors, the prospects of a
normal Indian monsoon appear to be high. Any positive forecast on the Indian
monsoon is expected to be seen positively by the market given elevated food
inflation. According to DB’s Meteorologist, La Nina conditions are expected to
persist through the summer and early fall of 2011. Empirically we have observed
that a La Nina condition is generally conducive to a good monsoon.
Are worries over a governance deficit and policy inertia abating?
A simultaneous occurrence of scams, corruption scandals and parliament being
gridlocked had raised fears of policy inertia in India, in January. Some of these
fears are now abating with parliament having reconvened. The passage of the
union budget and any other pending bills will further assuage investor worries of
governance gridlock on account of a stalled parliament. A resolution to the
contentious issues on coal mining and environmental approvals by a group of
ministers may bode well for market sentiment.
Raising banks to overweight, cutting metals and IT to equal weight
We are cutting our overweight position in metals and mining and IT services to
neutral and raising Indian banks to overweight from neutral. Our Top Picks are:
Axis Bank, Coal India, HDFC Bank, Hindustan Zinc, Infosys, ITC, RIL, M&M,
Tata Motors, and Tata Steel.
Indian market reaching an
inflection point?
YTD India has been the worst performing emerging market
Since the beginning of the calendar year the Indian market (BSE Sensex) has been among
some of the worst performing emerging markets (down 11.5% in $ terms). Valuations have
compressed by 230bps and India’s valuation premium to MSCI Asia has compressed by 100
bps to 280bps currently. The BSE Sensex currently trades at 14x one year forward earnings –
10% lower than past five year trading range. The underperformance has been driven by a
gale of headwinds ranging from fears of a policy overdrive to curb elevated inflation, policy
gridlock in Indian parliament, worries of a governance deficit and a sharp rise in global oil
prices.
While we remain cognizant of the escalating tensions in the MENA region inflating oil prices
and a potential worsening of the post earthquake nuclear crisis in Japan, we believe that
many of the India-specific macro risks (slowing industrial momentum, sharp rise in current
account deficit, worries of escalated FII outflows and policy inertia) which drove the first bout
of sharp underperformance since January are now either well discounted or abating.
With the exception of oil prices and a potential runaway increase in already elevated
commodity prices (barring oil, we believe this is a low probability event in 2HCY2011), we
expect to see a slow but certain recovery in the domestic macro situation as we head into
2HCY11. Consequently our view is that investors must begin to position portfolios for a
steady market recovery. We are cutting our overweight position in metals and mining and IT
services to neutral and raising Indian banks to overweight from neutral. Following a sharp
compression in valuations and underperformance in real estate, we are raising the sector to
neutral.
April –May: key months to watch out for
We see the markets reaching an inflection point in April-May and a directional shift upwards
setting in, during 2H2011. The next two months (Apr-May) are likely to be important for the
Indian equity markets on account of the following (1) release of Indian monsoon forecast by
Meteorological Department, (2) election results of five Indian states which will go to the polls
in April, and (3) FOMC and ECB meetings (particularly important given the recent
unanticipated increase in headline inflation in developed markets).
Uncertainty over oil prices remains the key investment overhang
for Indian markets
Continuing protests for democracy are becoming a systemic risk for the entire MENA region.
Protests spreading east from North Africa to Bahrain and Saudi Arabia, further compounded
by geopolitical commentary from Iran, have increased fears that the contagion of protests
may be more persistent than initially expected. This may keep oil prices elevated for a longer
time period.
India’s equity risk premium tends to rise sharply during periods of elevated oil prices. In 2008
the BSE Sensex multiple contracted by about 400bps over a period of six months after oil
pierced the psychological threshold of USD100. Continuing escalation of conflict may keep
investor sentiment in India muted. However we believe that a crude oil price in a range of
USD100-115 may be already discounted. If oil prices were to signal a sustainable move
upwards, India’s valuation may be impacted and the expected turnaround in the Indian equity
market may be delayed.
Inflation risk still elevated, but risk of policy error from central
bank may be overdone
Elevated inflation and more importantly, fears of an overtly aggressive monetary policy
response to curb inflation have been amongst the most significant worries for the Indian
equity markets, since January. We believe that while inflation is expected to trend down only
gradually, the risk of a policy error – the main worry for the markets – appears to be low.
The RBI’s response has been calibrated and there have been no knee jerk responses to
suggest that the RBI will move into a policy overdrive that would impact economic
momentum, like it did in the mid nineties. The consensus expectation of an additional 50 – 75
bps increase in rates from here is baked in the cake and hence largely discounted by equity
markets. The markets will be looking at headline inflation numbers and we expect a slow but
steady decline in headline inflation. In case commodity prices cool off in 2H following
concerns of a sooner-than-anticipated monetary tightening in developed markets, India’s
valuations will expand impressively. The Indian market was among the best performing
markets in 2010 when global commodity prices were benign.
With the improving growth outlook and rising inflation in US and stabilization in the Eurozone,
our global economists expect that both the Fed and the ECB would embark on a policy
tightening sooner than initially expected by the street.
Our Europe economist, Mark Wall, now expects the first rate hike from ECB to occur in April
’11 (barring a significant external shock), as a pre-emptive step to protect its inflation fighting
credibility. DB’s US economist Joseph LaVorgna believes that the Fed will fulfill its stated
intention of purchasing US$600bn worth of long-term treasury under QE2. It will likely also
begin to modify its "extended period" language sometime during that time frame, signaling
that the initial rate hike will follow within several meetings. With economic news improving,
they see a good chance of an initial hike in policy rates occurring around the end of 2011- and
tightening could proceed faster than what the market has currently priced in for 2012.
High likelihood of normal Indian monsoon in 2011
By April the Indian stock markets begin looking at the skies to gauge the prospects of the
Indian monsoon which sets in in June and continues till the end of year. With elevated food
inflation, the markets are eagerly looking forward to a favorable monsoon forecast from the
IMD. While the IMD releases its official monsoon forecast only in April –May, based on
meteorological trends and other weather factors, the prospects of a normal Indian monsoon
appear to be high.
As per the National Oceanic and Atmospheric Administration, the appearance and
development of La Niña over the past nine months has been the most powerful on record.
According to DB’s Meterologist, Corey Lefkof, the La Nina condition is expected to persist
through the summer and early fall of 2011 – albeit the intensity of La Nina may be lower than
the seen in Dec’10-Jan’11.
Empirically we have observed that La Nina conditions are generally conducive to good
monsoon precipitation for India. As seen in Figure 9, monsoon rainfall in India has either been
normal or above normal in 10 out of the past 12 instances of La Nina. This leads us to believe
that 2011 should in all likelihood witness a normal monsoon rainfall which should not only
stimulate agri-GDP, but also buoy domestic rural consumption and most importantly, prevent
any supply driven shocks to food grain prices.
Are worries over a governance deficit and policy inertia abating?
A simultaneous revelation of corruption and other scams (Commonwealth games, 2G
telecom and Adarsh housing society), historic stalling of entire winter session of Indian
parliament and fears of delayed and long, drawn out approval processes (on account of
environmental delays holding back coal mining and production) bottlenecking industrial
production, had compounded fears of policy inertia and a governance deficit, souring the
investment climate and consequently postponing the investment cycle.
Some of these fears are now abating with parliament having reconvened and with no walkout
by the opposition, stalling parliament proceedings. The passage of the union budget and any
other pending bills will further assuage investor worries of a governance gridlock on account
of a stalled parliament.
We believe that if the government is able to table the constitutional amendment bill to roll out
the highly anticipated and historic goods and services tax act, the markets will react favorably
and investor worries over the government’s inability to pass through contentious reform will
abate. It may also lead investors to believe that two of India’s largest political parties may be
working in consonance on issues of national significance and interest. With the cabinet
already approving the amendment bill and the pace at which the government appears to be
moving ahead on this bill, we will not be surprised if this bill is taken up by parliament in the
current budget session itself (though we do not expect this bill to be promulgated in this
session itself).
Meeting of Group of Ministers on mining and environment raises hope of successful
resolution to contentious issues on coal mining and industrial growth momentum
We believe that investors should also be watching out for the outcome of the high-powered
12-member ministerial group (GoM) which has been set up by the Indian prime minister to
reconcile environmental concerns, energy security and the needs of mining and infrastructure
sectors. According to media reports this group is likely to take up the contentious issue of Go
and No Go areas on mining, particularly coal. Some of these issues have considerably stalled
coal production in the country raising fears of an enlarged coal deficit crimping India’s energy
security and investments in coal dependent infrastructure projects. Any successful outcome
of this contentious issue will allay fears of stringent environmental regulations leading to long
and arduous approval processes holding back investments in coal mining, power and metals
industries. As per media reports, the GoM is scheduled to meet on March 25 after the
budget session of parliament ends. Markets will be eagerly looking for a favorable outcome
from this meeting. Reports have suggested that the government may replace its
controversial Go and No Go policy on mining with a more flexible policy which should be
conducive to India’s energy security.
A tale of two investors: Worries of FII flight remain unfounded
While the cumulative FII flows remain in the negative territory (-US$1.7bn YTD), the direction
of flows has shifted after the announcement of the Union budget. During March ’11 the FIIs
have invested ~US$538m into Indian equities, which although miniscule as compared to the
2010 flows, is an indication that investor interest may be reviving at the margin, especially
after India’s relative valuation has shrunk.
On the other end of the spectrum, domestic institutions have invested US$2.7bn YTD, driven
primarily by Insurance companies. While we acknowledge that such inflows are typical of the
fourth quarter of any financial year (especially as Insurance companies premium revenues
tend to be back ended), we are more enthused by turn in fortunes of the mutual funds which
have been witnessing net inflows and lower redemptions for past three months. We believe
that the worst of the regulatory issues may be behind for domestic mutual funds and
regulatory pre-disposition should get better for the domestic mutual funds going forward. In
addition, the Union Budget announcement of allowing foreign retail investors to invest
directly in domestic mutual funds should also be incrementally beneficial.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
April – May: an inflection point for Indian equity market?
Barring oil prices and any systemic risk arising from the fallout of the nuclear
accident in Japan, we believe that the sharp underperformance of the Indian
equity market (YTD Sensex has underperformed MSCI Asia by 700bps) may be
bottoming. We see the markets reaching an inflection point in April-May and a
directional shift upwards setting in, during 2H2011. Apr-May are likely to be
important for the Indian equity markets on account of (1) release of Indian
monsoon forecast by Meteorological Department (2) election results of five Indian
states which will go to the polls in April (3) Group of Ministers Meeting to discuss
contentious issues on coal mining and environmental approvals (4) FOMC and
ECB meetings (given the recent unanticipated increase in inflation in DM).
Inflation risk still elevated but risk of monetary policy error may be overdone
Elevated inflation and more importantly, fears of an overtly aggressive monetary
policy response to curb inflation have been amongst the most significant worries
for the Indian equity markets, since January. We believe that while inflation is
expected to trend down only gradually, the risk of a policy error – the main worry
for the markets – appears to be receding. The RBI’s response has been calibrated
and there have been no knee jerk responses to suggest that the RBI will move into
a policy overdrive that would impact economic momentum, like it did in the mid
nineties. The consensus expectation of an additional 50 – 75 bps increase in rates
from here is baked in the cake and hence largely discounted by equity markets.
High likelihood of normal Indian monsoon in 2011
Based on meteorological trends and other weather factors, the prospects of a
normal Indian monsoon appear to be high. Any positive forecast on the Indian
monsoon is expected to be seen positively by the market given elevated food
inflation. According to DB’s Meteorologist, La Nina conditions are expected to
persist through the summer and early fall of 2011. Empirically we have observed
that a La Nina condition is generally conducive to a good monsoon.
Are worries over a governance deficit and policy inertia abating?
A simultaneous occurrence of scams, corruption scandals and parliament being
gridlocked had raised fears of policy inertia in India, in January. Some of these
fears are now abating with parliament having reconvened. The passage of the
union budget and any other pending bills will further assuage investor worries of
governance gridlock on account of a stalled parliament. A resolution to the
contentious issues on coal mining and environmental approvals by a group of
ministers may bode well for market sentiment.
Raising banks to overweight, cutting metals and IT to equal weight
We are cutting our overweight position in metals and mining and IT services to
neutral and raising Indian banks to overweight from neutral. Our Top Picks are:
Axis Bank, Coal India, HDFC Bank, Hindustan Zinc, Infosys, ITC, RIL, M&M,
Tata Motors, and Tata Steel.
Indian market reaching an
inflection point?
YTD India has been the worst performing emerging market
Since the beginning of the calendar year the Indian market (BSE Sensex) has been among
some of the worst performing emerging markets (down 11.5% in $ terms). Valuations have
compressed by 230bps and India’s valuation premium to MSCI Asia has compressed by 100
bps to 280bps currently. The BSE Sensex currently trades at 14x one year forward earnings –
10% lower than past five year trading range. The underperformance has been driven by a
gale of headwinds ranging from fears of a policy overdrive to curb elevated inflation, policy
gridlock in Indian parliament, worries of a governance deficit and a sharp rise in global oil
prices.
While we remain cognizant of the escalating tensions in the MENA region inflating oil prices
and a potential worsening of the post earthquake nuclear crisis in Japan, we believe that
many of the India-specific macro risks (slowing industrial momentum, sharp rise in current
account deficit, worries of escalated FII outflows and policy inertia) which drove the first bout
of sharp underperformance since January are now either well discounted or abating.
With the exception of oil prices and a potential runaway increase in already elevated
commodity prices (barring oil, we believe this is a low probability event in 2HCY2011), we
expect to see a slow but certain recovery in the domestic macro situation as we head into
2HCY11. Consequently our view is that investors must begin to position portfolios for a
steady market recovery. We are cutting our overweight position in metals and mining and IT
services to neutral and raising Indian banks to overweight from neutral. Following a sharp
compression in valuations and underperformance in real estate, we are raising the sector to
neutral.
April –May: key months to watch out for
We see the markets reaching an inflection point in April-May and a directional shift upwards
setting in, during 2H2011. The next two months (Apr-May) are likely to be important for the
Indian equity markets on account of the following (1) release of Indian monsoon forecast by
Meteorological Department, (2) election results of five Indian states which will go to the polls
in April, and (3) FOMC and ECB meetings (particularly important given the recent
unanticipated increase in headline inflation in developed markets).
Uncertainty over oil prices remains the key investment overhang
for Indian markets
Continuing protests for democracy are becoming a systemic risk for the entire MENA region.
Protests spreading east from North Africa to Bahrain and Saudi Arabia, further compounded
by geopolitical commentary from Iran, have increased fears that the contagion of protests
may be more persistent than initially expected. This may keep oil prices elevated for a longer
time period.
India’s equity risk premium tends to rise sharply during periods of elevated oil prices. In 2008
the BSE Sensex multiple contracted by about 400bps over a period of six months after oil
pierced the psychological threshold of USD100. Continuing escalation of conflict may keep
investor sentiment in India muted. However we believe that a crude oil price in a range of
USD100-115 may be already discounted. If oil prices were to signal a sustainable move
upwards, India’s valuation may be impacted and the expected turnaround in the Indian equity
market may be delayed.
Inflation risk still elevated, but risk of policy error from central
bank may be overdone
Elevated inflation and more importantly, fears of an overtly aggressive monetary policy
response to curb inflation have been amongst the most significant worries for the Indian
equity markets, since January. We believe that while inflation is expected to trend down only
gradually, the risk of a policy error – the main worry for the markets – appears to be low.
The RBI’s response has been calibrated and there have been no knee jerk responses to
suggest that the RBI will move into a policy overdrive that would impact economic
momentum, like it did in the mid nineties. The consensus expectation of an additional 50 – 75
bps increase in rates from here is baked in the cake and hence largely discounted by equity
markets. The markets will be looking at headline inflation numbers and we expect a slow but
steady decline in headline inflation. In case commodity prices cool off in 2H following
concerns of a sooner-than-anticipated monetary tightening in developed markets, India’s
valuations will expand impressively. The Indian market was among the best performing
markets in 2010 when global commodity prices were benign.
With the improving growth outlook and rising inflation in US and stabilization in the Eurozone,
our global economists expect that both the Fed and the ECB would embark on a policy
tightening sooner than initially expected by the street.
Our Europe economist, Mark Wall, now expects the first rate hike from ECB to occur in April
’11 (barring a significant external shock), as a pre-emptive step to protect its inflation fighting
credibility. DB’s US economist Joseph LaVorgna believes that the Fed will fulfill its stated
intention of purchasing US$600bn worth of long-term treasury under QE2. It will likely also
begin to modify its "extended period" language sometime during that time frame, signaling
that the initial rate hike will follow within several meetings. With economic news improving,
they see a good chance of an initial hike in policy rates occurring around the end of 2011- and
tightening could proceed faster than what the market has currently priced in for 2012.
High likelihood of normal Indian monsoon in 2011
By April the Indian stock markets begin looking at the skies to gauge the prospects of the
Indian monsoon which sets in in June and continues till the end of year. With elevated food
inflation, the markets are eagerly looking forward to a favorable monsoon forecast from the
IMD. While the IMD releases its official monsoon forecast only in April –May, based on
meteorological trends and other weather factors, the prospects of a normal Indian monsoon
appear to be high.
As per the National Oceanic and Atmospheric Administration, the appearance and
development of La Niña over the past nine months has been the most powerful on record.
According to DB’s Meterologist, Corey Lefkof, the La Nina condition is expected to persist
through the summer and early fall of 2011 – albeit the intensity of La Nina may be lower than
the seen in Dec’10-Jan’11.
Empirically we have observed that La Nina conditions are generally conducive to good
monsoon precipitation for India. As seen in Figure 9, monsoon rainfall in India has either been
normal or above normal in 10 out of the past 12 instances of La Nina. This leads us to believe
that 2011 should in all likelihood witness a normal monsoon rainfall which should not only
stimulate agri-GDP, but also buoy domestic rural consumption and most importantly, prevent
any supply driven shocks to food grain prices.
Are worries over a governance deficit and policy inertia abating?
A simultaneous revelation of corruption and other scams (Commonwealth games, 2G
telecom and Adarsh housing society), historic stalling of entire winter session of Indian
parliament and fears of delayed and long, drawn out approval processes (on account of
environmental delays holding back coal mining and production) bottlenecking industrial
production, had compounded fears of policy inertia and a governance deficit, souring the
investment climate and consequently postponing the investment cycle.
Some of these fears are now abating with parliament having reconvened and with no walkout
by the opposition, stalling parliament proceedings. The passage of the union budget and any
other pending bills will further assuage investor worries of a governance gridlock on account
of a stalled parliament.
We believe that if the government is able to table the constitutional amendment bill to roll out
the highly anticipated and historic goods and services tax act, the markets will react favorably
and investor worries over the government’s inability to pass through contentious reform will
abate. It may also lead investors to believe that two of India’s largest political parties may be
working in consonance on issues of national significance and interest. With the cabinet
already approving the amendment bill and the pace at which the government appears to be
moving ahead on this bill, we will not be surprised if this bill is taken up by parliament in the
current budget session itself (though we do not expect this bill to be promulgated in this
session itself).
Meeting of Group of Ministers on mining and environment raises hope of successful
resolution to contentious issues on coal mining and industrial growth momentum
We believe that investors should also be watching out for the outcome of the high-powered
12-member ministerial group (GoM) which has been set up by the Indian prime minister to
reconcile environmental concerns, energy security and the needs of mining and infrastructure
sectors. According to media reports this group is likely to take up the contentious issue of Go
and No Go areas on mining, particularly coal. Some of these issues have considerably stalled
coal production in the country raising fears of an enlarged coal deficit crimping India’s energy
security and investments in coal dependent infrastructure projects. Any successful outcome
of this contentious issue will allay fears of stringent environmental regulations leading to long
and arduous approval processes holding back investments in coal mining, power and metals
industries. As per media reports, the GoM is scheduled to meet on March 25 after the
budget session of parliament ends. Markets will be eagerly looking for a favorable outcome
from this meeting. Reports have suggested that the government may replace its
controversial Go and No Go policy on mining with a more flexible policy which should be
conducive to India’s energy security.
A tale of two investors: Worries of FII flight remain unfounded
While the cumulative FII flows remain in the negative territory (-US$1.7bn YTD), the direction
of flows has shifted after the announcement of the Union budget. During March ’11 the FIIs
have invested ~US$538m into Indian equities, which although miniscule as compared to the
2010 flows, is an indication that investor interest may be reviving at the margin, especially
after India’s relative valuation has shrunk.
On the other end of the spectrum, domestic institutions have invested US$2.7bn YTD, driven
primarily by Insurance companies. While we acknowledge that such inflows are typical of the
fourth quarter of any financial year (especially as Insurance companies premium revenues
tend to be back ended), we are more enthused by turn in fortunes of the mutual funds which
have been witnessing net inflows and lower redemptions for past three months. We believe
that the worst of the regulatory issues may be behind for domestic mutual funds and
regulatory pre-disposition should get better for the domestic mutual funds going forward. In
addition, the Union Budget announcement of allowing foreign retail investors to invest
directly in domestic mutual funds should also be incrementally beneficial.
No comments:
Post a Comment