GDP growth to slow; downgrades likely We expect FY13 GDP to slow to 6.8% and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5%. A slower GDP will be led by: (a) a slowing global economy, (b) impact of high rates and (c) slowing investment spend.
Earnings downgrades to continue
We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 (growth of under 10% vs.expectations of nearly 15%).
Consequently……We expect the Indian equities to head lower in 1H2012 led by the falling growth, worsening domestic macro fundamentals, deteriorating earning profile, slowing global economy and elevated risk of more adverse outcome from Europe. We also expect the market to get slightly de-rated, given the Indian equity valuations are still at premium to peers.
…would provide better trading opportunities
Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity. The current cycle is proving to be quite similar to 1990's where markets remained in a broad trading range during 1994-1999. The long term (5yr) Sensex returns chart suggests that 2012 may see market record the bottom of the cycle. Though, a new secular bull market does not appear to be in sight as yet.
The upside to be driven by rate cuts and policy initiatives
We see tough times for markets near term and believe that market could recover in later part of the year, to end 2012 with a positive return. The recovery would be triggered by the RBI easing the policy stance, cutting rates and Government taking policy decisions to kick-start investment spend. In our view, RBI should start easing from March and lending rates may fall by 150bps during April-September period.
Strategy: gingerly buy the dips below15K, sell above 18K
Given our view that on top down basis Sensex may fall to 14500 level in 1H2012 and see a recovery to 19K level by the year end, we suggest buying the dips below 15K and selling above 18K levels. As we expect rate cuts to be a key theme for the market in 2012, we suggest rate sensitives for trading. However, we would prefer to play rate sensitives through consumer discretionary, i.e., passenger auto, and defensive large private sector banks rather than infrastructure and real estate.
We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 (growth of under 10% vs.expectations of nearly 15%).
Consequently……We expect the Indian equities to head lower in 1H2012 led by the falling growth, worsening domestic macro fundamentals, deteriorating earning profile, slowing global economy and elevated risk of more adverse outcome from Europe. We also expect the market to get slightly de-rated, given the Indian equity valuations are still at premium to peers.
…would provide better trading opportunities
Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity. The current cycle is proving to be quite similar to 1990's where markets remained in a broad trading range during 1994-1999. The long term (5yr) Sensex returns chart suggests that 2012 may see market record the bottom of the cycle. Though, a new secular bull market does not appear to be in sight as yet.
The upside to be driven by rate cuts and policy initiatives
We see tough times for markets near term and believe that market could recover in later part of the year, to end 2012 with a positive return. The recovery would be triggered by the RBI easing the policy stance, cutting rates and Government taking policy decisions to kick-start investment spend. In our view, RBI should start easing from March and lending rates may fall by 150bps during April-September period.
Strategy: gingerly buy the dips below15K, sell above 18K
Given our view that on top down basis Sensex may fall to 14500 level in 1H2012 and see a recovery to 19K level by the year end, we suggest buying the dips below 15K and selling above 18K levels. As we expect rate cuts to be a key theme for the market in 2012, we suggest rate sensitives for trading. However, we would prefer to play rate sensitives through consumer discretionary, i.e., passenger auto, and defensive large private sector banks rather than infrastructure and real estate.
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