Silver lining in the midst
of dark clouds
Markets are poised for relatively better
times ahead
Market negotiates through a tough global
environment and a seasonally weak summer: In our
last Market Outlook report released in early May (titled "The heat is on"), we
had turned cautious against the backdrop of the rising crude prices and the
nervousness prior to some important global and domestic events in the already
seasonally weak summer period. The market did lose some ground and the overall
pessimism only heightened on the back of the Reserve Bank of India (RBI)'s
status quo on policy rates, the downgrade of India's rating outlook and the
fragile euro situation during the last two months. However, we believe that the
Indian equity market has negotiated the tough period without much damage and is
potentially poised for relatively better times over the next few months.
Emerging positives amid despondency:
Given the slew of negatives, some of the positive
developments and pointers have been largely ignored. These are as follows.
-
Commodities cool off (including crude):
A decent correction in commodities especially
crude oil is inherently positive for the Indian economy, the corporates and the
equity market. It does three things: eases the pressure on fiscal health;
positively affects corporate margins and makes India better placed for foreign
investors as compared with its commodity exporting peers like Brazil, Russia and
Indonesia.
-
Political changes could end policy inertia:
The domestic political situation has turned
more conducive with the prime minister taking charge of the finance ministry as
well and the Samajwadi Party (SP) formally putting its weight behind the United
Progressive Alliance (UPA) II, thereby marginalising the troublesome coalition
partner Trinamool Congress' importance in forging a political consensus to push
forward the pending and much awaited policy decisions. Mind you, we do not
expect any major fireworks or path-breaking reforms but the very breaking out of
the policy inertia is enough to boost the market's confidence as expectations
are pretty low.
-
Valuations and high cash levels supportive:
The rupee's depreciation has turned the
valuations of Indian equities all the more cheaper for foreign investors who are
sitting on a record level of free cash (especially the Asian and emerging market
funds), according to one of the recent surveys done for a global bank and
research house.
Euro zone: kicks the can down the road again:
The euro zone members have come out with a
patchwork of a solution to soothe the unnerved financial markets. The plan to
directly support European banks and intervene in the bond markets to support
member states has led to a burst of optimism which could fade off after the
initial reaction.
Pressure points: resumption in earnings downgrades
and weak beginning of monsoon season: It could
have been better for the Indian equities but for the disappointing Q4FY2012
results of some index heavyweights and the overall resumption of the downgrade
in the consensus earnings estimates by research houses after a pause of a few
months. The higher than expected asset quality concerns in the banking sector
was the key negative takeaway from the Q4 report card. The monsoon could also
play a spoilsport. The beginning is weak and the increasing probability of El
Nino in the later part of the monsoon season would put further pressure on the
economy, which is already suffering from slowing industrial activity with signs
of a slowdown in the services sector also. Moreover, a weaker monsoon would
boost inflationary pressures and could further delay the easing of the monetary
cycle.