Macro & Markets - April showers more gloom: Edelweiss PDF link

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Indian equities’ tepid performance in March continued in April as well with both domestic and global concerns playing their part. Lingering uncertainty on GAAR, RBI’s guidance of limited room for further rate cuts (50bps cut notwithstanding), renewed weakness in incoming US data, resurfacing of European problems and associated weakness in INR weighed on market sentiments. Consequently, Indian equities posted their second consecutive month of decline. The correction, however, has meant that they have started to look inexpensive on both relative and absolute basis. Meanwhile, though earnings are on track, recent downgrades have taken some steam off the estimates’ trajectory.

US GDP growth is weakening

US Q1CY12 GDP growth was below expectation at 2.2% annual rate, predominantly on account of robust private consumption. Importantly, the surge in consumer spending was led by fall in savings rather than rise in incomes and hence raises questions about its sustainability. Business investment was weak and government spending acted as a drag on growth. Overall, the data validates Bernanke’s assessment that the underlying economic activity is not as strong as sharp improvement in labour market suggests.

INR losing ground

A combination of rising global risk aversion and wide CAD led to renewed weakness in INR in March/April 2012. Amidst risk aversion, European banks tend to retrench their USD exposures to emerging markets, as observed in August-September 2011, thereby triggering sharp decline in emerging markets currencies. Meanwhile, the underlying CAD also tends to exaggerate the fall. However, after the fall, INR is not overvalued on REER basis, unlike Q2FY12.

RBI springs 50bps rate cut surprise

RBI surprised markets with a 50bps cut in repo rate (CRR unchanged) as core inflation eased and growth slowdown deepened. However, the accompanying guidance trimmed expectations of further rate cuts.  In our view, progress of South West monsoon and the government action on retail fuel prices will be crucial in shaping the central bank’s policy in coming months. Barring a failed monsoon, inflation should remain around the current level and since growth is faltering, Mint Street will undertake at least another 25bps policy rate cut, although timing of the move is still uncertain.

Earnings: Slight setback

Indian equities had a tepid April, posting their second consecutive month of decline. The correction has also meant that Indian equities have started to look inexpensive on both relative as well as absolute basis. Earnings seem to be progressing on track, but recent downgrades seem to have taken some steam off the estimates’ trajectory.

Macro & Markets - April showers more gloom

       
       
       
       
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