Perspective on Debt Markets
Inflation is likely to ease from January 12 onwards due to positive base effect and decline in commodity prices. The fall in crude and commodity prices was partially off-set by the sharp fall in the value of the Rupee. We expect the monetary policy to be in a state of pause till the end of FY12. The total borrowing in January 12 as per the RBI Calendar is placed at Rs 55,000 cr. We expect the response to the borrowing program in January to be completed without any major disruptions. We expect the Open Market Operations of RBI to continue in January 12. Liquidity situation is expected to remain in deficit mode though the quantum of deficit may be lower due to continuous OMOs by RBI. Overall, we expect the 10 year Government Securities yield in the range of 8.25% - 8.75% in January 12.
Domestic Equity Markets
Technology and Industrials were the best and worst performing sectors during last month. In 2011, Consumer Staples was the best while Telecoms was the worst. Also, during this period, all sectors, except Healthcare, underperformed their respective EM sectors.
In December, FIIs turned marginal buyers of Indian equities while domestic institutions remained buyers for a second consecutive month (~USD 0.3bn). In the futures market, FIIs were sellers (~USD 0.2bn). In 2011, FIIs sold ~USD 0.5bn of stocks (they were sellers in 6 out of 12 months) while domestic institutions bought ~USD 6bn of stocks (they were buyers in 7 out of 12 months). Mutual funds and domestic insurance companies bought USD 1.4bn and USD 4.6bn worth of stocks in 2011 respectively. Average cash volumes and turnover fell MoM. Derivatives turnover declined by 2% MoM. Hedging activity edged up further to a new high, up 17% MoM.
Perspective on Equity Markets
Markets started the New Year with a fresh wave of positive reports on the US economy and that could temporarily help turn the focus away from Europe. Political risk has become the wildcard in the outlook.
2012 is expected to be a bumpy year for the global economy with recession in Europe, anemic growth at best in the United States and a sharp slowdown in China and in most emerging-market economies. Accelerating balance sheet adjustments are exacerbating the slowdown in the more heavily-indebted G7 nations. The US economy appears to be on firmer albeit unsteady footing. The euro zone is at 'ground zero' because significant sovereign debt problems are being compounded by intensifying banking sector strains. We feel no advanced nation will escape the weaker growth consequences caused by some combination of fiscal retrenchment, household deleveraging, or financial sector caution.
Europe’s debt situation is still driving markets. The euro zone is tipping into recession. Increasing fiscal austerity is deepening the downturns in the more heavily-indebted southern peripheral countries. The failure to resolve the festering sovereign debt crisis has allowed the contagion to spread, pushing government borrowing costs sharply higher, and aggravating the debt sustainability of some of the larger nations.
Three key interconnected issues dominate the investment landscape: first, and most importantly, the outlook for global growth and profits. The tight correlation between the market and earnings since 2004 suggests this aspect is likely to continue to dominate. The second, and closely-related issue, is the risk of a break-up of the euro. Third, the simultaneous deleveraging of both the public and private sectors in many parts of the world reinforcing the historically sub-par performance in terms of growth. Market valuations have moved to levels that, in our view, already partially discounting a ‘tail risk’ event.
Among the larger and less-indebted emerging countries, output growth is moderating in response to reduced trade flows associated with the sharper slide in European and US activity, as well as the tightening of their respective domestic credit conditions. Even so, many of these emerging nations are expected to remain on a fundamentally stronger growth trajectory. Significant investments by governments and businesses, financed by massive savings balances, are supporting the transition to more domestic-led growth. But the key for the emerging market countries would be the deficits, CAD and earnings growth as a global linkage of the emerging markets has expanded in last five years and could prove detrimental, as global growth remains anemic. India remains no exception and would go through the painful adjustment. However, given compressed valuation multiples, time to time there would be rallies in markets which may not be sustainable for next 6 months and we do not see any secular bull run in markets till earnings growth picks up.
Note: The above data has been generated from sources in public domain.