Outlook for Indian mkts changes to optimism

A week into the new year, market analysts have changed their tune about the markets. The sombre mood in December is giving way to an optimistic outlook.

Despite the risks, Credit Suisse has upgraded India to neutral from underweight. Analysts say a combination of domestic and global factors are expected to lead to Indian markets “regaining a part of the lost charm”. The biggest dom-estic trigger that everyone is expecting is the much-awaited cut in interest rates by the Reserve Bank of India (RBI). It officially announced a turn in its interest rate stance on December 16, and deputy governor Subir Gokarn on Thursday said interest rates and inflation seemed to have peaked. The rate of food inflation has also crashed from double digits in October.

Apart from domestic triggers, analysts say the Euro-pean Central Bank (ECB) may have to print its way out of the current crisis. ECB’s balance sheet has grown 20 per cent in the last three months and is expected to grow another 20 per cent in the next three months. The market is expecting a “powerful blast” of quantitative easing in the coming months. This will support Indian equities.
 

CHANGING TIMES
Domestic Factors  Monetary easing may start in FY13 Earnings downgrade factored in, few negative surprises Earnings growth estimate for FY13 at 16.3% Core inflation to remain between 5-6% levels through 2012 Policy logjam to ease after March GDP growth to recover to 8% levels in second half of 2012	Global Factors Global GDP growth will slow to 3.9% in 2012, while emerging markets to likely to clock 8.5% Loosening monetary policy from the European Central Bank and quantitative easing from Europe and USA Global commodity prices expected to remain benign Federal Reserve and ECB will ensure financial system holds up

It is an accepted fact that Europe is almost sure to slip into recession, which will also affect the nascent recovery seen in the US. Saurabh Mukherjea, head of equities at Ambit Capital, says: “Central banks on both sides of the Atlantic are likely to react to this sort of economic weakness with a powerful blast of QE (large enough to rival the post-Lehman blast). As a result, the risk appetite of Western investors will stay at levels marginally supportive from an Indian perspective.”

Given the kind of issues facing the developed world, the rush of capital will be on the lookout for investment opportunities in debt and equity categories. So far as timing is concerned, India’s debt markets are ripe for investing. Ashish Agarwal, head of rates strategy (Non-Japan Asia) at Credit Suisse, Singapore, explains: “Rate hikes are clearly over and the central bank is expected to start easing rates, perhaps meaningfully, in the coming months. This is a good backdrop to invest in the bond market. Currently, investors are underweight on Indian bonds as the access is limited. In some Asian markets, foreign investors own as much as 30 per cent of bonds but in India this figure would be as low as three per cent. In addition to global bond funds, central banks and sovereign funds could also be interested in owning the India paper at this point of time.”

With food inflation falling to 0.42 per cent in the middle of December from a high of 11.43 in October, RBI has some comfort on the inflation front, too. According to Manishi Ray-chaudhuri of BNP Paribas, analyses show the combination of declining input prices (commodity prices) and declining capacity utilisation should lead to lower core inflation — to a range of five-six per cent for most of 2012. While most analysts and economists were earlier not expecting RBI to cut rates before the second half of 2012-13, the expectation now is that this could come in March.

Bank of America Merrill Lynch’s India economist, Indranil Sen Gupta, expects RBI to cut policy rates 100 basis points between March and July. He says: “With loan demand slowing, lending rates may come off 150 bps from April.”

Clearly, after touching rock-bottom levels, things are slated to rebound. India’s GDP growth, like the equity market, is expected to bottom out in the second quarter of 2012. BNP Paribas expects GDP to recover to 8-8.5 per cent by the first half of 2013. “We expect industrial growth to be the biggest driver of this recovery,” says Raychaudhuri.

Economists also expect the government’s policy logjam to ease after the state elections. According to Vikas Khemani, president, Edelweiss Securities, the government may show some life after March which would create intermittent rallies in the market.

So, where are equity markets likely to head in 2012? Given the raft of domestic and global factors that are expected to support domestic markets, analysts expect Sensex to trade in the range of 14,500-19,000 over the next 12 months. While earnings have broadly bottomed out, there could be some negative surprises.

Earnings estimates have been consistently downgraded in the past few months, but most analysts expect little downside from here. According to BNP Paribas, current earnings growth estimates stand at 11 per cent for FY12 and 16.3 per cent for FY13. While the headline FY13 earnings growth may seem high, it is bouncing from a depressed base of FY12 and is in line with our nominal GDP growth forecast of 13.4 per cent for FY13.

So is it the time to say cheers? Yes, perhaps, after the financial year ends.