Asian markets YTD performance have been mixed
with Indonesia, Philippines & Thailand performing exceptionally well and at
the same time India, Hong kong and Korea giving negative returns. Though the
biggest underperformer remains the Indian markets with a 3.6% YTD decline. At
the start of this calendar year 2013, Indian sentiment remained quite
optimistic and India specific research reports were majorly predicting a new
high in Nifty & Sensex on the back drop of improving fundamentals and
earning outlook. And as things stands now, we are struggling to hold the 200DMA
stacked up at 5650 in Nifty. This is in contrast to the developed markets which
are either hitting all time highs or are at a kissing distance from the all
time high. It doesn’t seem that the contrasting trend in the market is
unanimously across Asian markets or a strategic call in between the developed
and the developing markets. In the last couple of weeks, first the
budget-2013-14 and thereafter the money laundering revelations being
sensationalized (which RBI overruled later) and then the political development
has triggered a fall in the Indian market. And the interesting part is that the
fall has been without no major outflows from Foreign institution Investors and
the DII’s continue to sell in the bourses. More alarming is the fact that
midcaps continue to bleed heavily and March month was one another disaster.
Retail participation continues to remain bleak and prices of majority of stocks
outside the Nifty component reflects a horrifying picture of the market
internals.
For the last three calendar years i.e., in
2011, market remained extraordinarily bearish, in 2012 it was quite bullish and
in 2013 the tone seems to be bearish and the broad contours have been from 4500
to 6200 in Nifty. In 2011 market started declining after a failed attempt to
cross all time high from 6200 and marked a low of 4500 in almost a years time
and thereafter in 2012, it staged a rally and again attempted to cross the all
time high and in 2013 it reversed its trend from almost 6200 despite of the
fact that developed markets and specifically US market is making all time
highs. Though for our market, a spate of domestic developments have weakened
sentiment considerably. Auto sales data, Cement dispatches, telecom
subscriber’s data, capital goods order inflow and other crucial data continues
to remain sluggish, indicating weaker demand for industrial sector. On top of
it, to further accentuate the problem, quarterly GDP print coming at 4.5% and
DMK, a key ally, pulling out support from the UPA-II government adds to more
uncertainty.
Going forward, it seems that the market has
to live with the political uncertainty and risk of an early election in 2013
looms large. The UPA-II coalition remains vulnerable because of its key ally
i.e., DMK, surprisingly withdrawing support and remaining parties like the SP
and the BSP cannot be relied upon with any degree of certainty. Now the
relatively less reliable parties who are supporting the government from outside
may pull the string and market may initially react violently as and when it
happens. Broadly from the valuation stand point market is trading at roughly
12.73 times one year forward earnings which is reasonably below historical mean
valuations. Any sharp fall would throw excellent opportunity to add on to
reasonably good blue chip stocks in 2013. The recent political development will
certainly put reform process more difficult and populist measures will take
precedence.
For 2013, it seems that two major triggers
could have a bearing on the markets. First, the political upheaval which has
already been discussed above and secondly, the CAD and the BoP situation. At a
time when USD is strengthening against major currencies whereas majority of the
Asian markets are still reeling under economic slowdown will have negative
consequences reflecting in their weaker currencies. It needs to be seen that
how far the central bankers move in order to defend a weaker currency. Though
RBI somewhat seems to be following the stance of defending the rupee by selling
dollars out of its reserves. This may have an effect of a larger degree in
terms of tight liquidity situation and tighter monetary policy. It all depends
on the behavior of Dollar against a basket of currencies. Dollar strengthening
in 2013 probably could be a harbinger of bad times for emerging markets and
needs to be closely watched. Moreover for India, more than the external account
imbalance, capital flows drying in 2013 will have an immediate impact on the
markets in a rising dollar context.
These two global and local event have the potential to
spook the market in 2013 but those events if it were to happen would give a
great buying opportunity into good quality stocks as the valuations would be
extremely compelling once these negative events plays out and market reacts in
a jiffy. At present macro indicators seems to be at its worst form and things
would be better than what they are today in next twelve to eighteen months
whether it’s the interest rates, GDP growth, earnings outlook, inflation or the
IIP growth. Hence ideally buying opportunities should be seized in the present
moment. What companies to pick and choose from is an individual’s call. Our
broader generalized call would be to stick to the blue-chips and large size
companies with good corporate governance, strong franchise and better cash
flows will take care of better returns
in the future.
Growth Indicators...
