India Equity Strategy India Equities 1Q Review – Heart ache for Bulls::JPMorgan

 It has been a frustrating 1Q CY2013 for equity investors in India.
Despite receiving a disproportionately high part of equity portfolio
flows into Emerging Markets, Indian Equities have underperformed
peer group. The MSCI India is down 5% vs. a decline of 4% for MSCI EM
and a gain of 3% for MSCI Asia.
 Market internals are worse than the extent of underperformance would
suggest. Only two sectors, both global — IT services & Healthcare — have
outperformed. Most other sectors are down substantially. The small and mid
cap indices have also fared poorly compared to the large cap index. CNX
Mid Cap and Small cap NIFTY are down 13% and 15% respectively vs. a
decline of 6% for the NIFTY.
 Concerns on the policy front likely drove underperformance. Indian
equities’ outperformance over 4QCY2012 was driven by the
government’s policy blitz. The same momentum could not be sustained in
1QCY2013, particularly in the Union Budget. Markets are also concerned
about the likely impact of the realignment in political equations (the DMK
pulled out of the UPA coalition, reducing the latter’s effective strength in
Parliament) and the substantial election calendar (nine state elections and
the National election over the next 12 months) on policy making.
Thankfully market expectations on reforms have now moderated, reducing
the scope for disappointments on this front.
 Into 2Q, the focus will likely be on macro data, particularly given
consensus expectations of an improvement herein. We remain cautious
(a position we have held since late January) as we believe there is room for
disappointment. Recent high frequency data suggests that the slowdown may
have accentuated over 1Q CY. Also there is likely to be a time lag between
policy actions taken and their impact on macro variables. We believe the
earliest a modest recovery may manifest itself would be in 2H FY. We
would also highlight India’s technical vulnerability to any global risk-off as
it remains an ‘over owned’ market in the context of EM and has huge
Current Account Deficit funded primarily by portfolio flows.

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