Equity Market: Nov. 2011
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After a sharp rally in the month of October 2011 due to announcement of European rescue plan and RBI indicating on pausing the rate hikes, the Indian market ended the November month with worst monthly performance among global markets with the BSE Sensex and S&P Nifty falling 8.9% and 9.3% respectively. The Indian market has been underperforming as pressure on fiscal deficit mounts, stubborn inflation and laggard impact of monetary tightening is taken a beating on domestic growth supported by ongoing concerns in US and Europe.
India’s seasonally adjusted PMI slump to 49.1 in October 2011 for the second consecutive month and to its lowest level in 30 months reflecting weak new order growth in the wake of uncertainty over global conditions. Industrial production growth fell to 1.9% YoY in September from 3.6% YoY growth in the previous month and below market expectation of 3.5% YoY. The weak data was primarily on the back of weakness in the mining sector. Further, India’s fiscal deficit during April-Sept 2011 stood at Rs. 2.2 lakh crore or 70.8% of the full year target. Weak global market also weighed on domestic market as the Greek prime minister called a referendum on the bailout package, thus putting pressure on the euro zone crisis. While most of the sector ended in the red for the November month, Realty, Consumer Durables, Metals and Bankex were the top four losers, which feel by 18.2%, 14.4%, 14.1% and 14% respectively. However, IT, FMGC and Healthcare fell least by 5.7%, 3.7% & 1.3 respectively due to defensive bets and depreciating rupee.
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Outlook
RBI has stood as the only central bank that has continued to hike rates by 525 bps in this cycle despite economic indicators showing signs of drastic growth slowdown. This has further accelerated the slowdown in the economy as high cost of funds are making projects unviable and increasing the working capital cost. With Most central banks across Emerging markets reversing their tightening policies and have begun interest cut 3-4 months back, the interest rate cycle is clearly bound to reverse and should support the markets. The current market situation is akin to early 2009 where everyone could see negativity and that was the time the market bottomed. On Valuation, the broader markets are today nearing historic lows and overall market is trading at attractive valuation. We suggest to invest in equities in staggered manner at this stage as markets has taken into price most of the negatives and risk reward are favorable.
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Debt Market : Nov. 2011 |
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The month of November that has been gone by, Indian G-Sec bond yields ended lower by 14 bps at 8.74%. Bond yields fell in the month bolstered by the central bank's assurance to provide adequate liquidity and weak economic data. The central bank conducted two rounds of debt repurchases to help ease tight cash conditions and ensure government bond sales sail through smoothly. The bond yield had hit a 39-month high of more than 9 percent in early November.
The Reserve Bank of India (RBI) in its Q2FY12 monetary policy review indicated that the likelihood of further policy rate hike in the next policy review is likely to be lower. Since March 2010, RBI has stuck to its anti-inflationary stance and has raised the key policy rates 13 times. The cost of overseas borrowing has increased due to ongoing sovereign debt crisis in the Eurozone & risk-aversion among global investors. The Indian Rupee depreciated by 5.5% against the dollar in November. The Indian rupee extended its weakness trailing a pessimistic global environment that weighed down investor sentiments.
Food inflation has started to cool off over the last one month, though the overall Inflation still remains well above the RBI’s comfort zone. Yields moved up slightly over the last month particularly the very short end due to tight liquidity and at the longer end of the yield curve due to higher supply and inflation concern. WPI headline inflation remained sticky above the 9% mark with October data coming in at 9.73% YoY (marginally above market consensus of 9.66% YoY) as compared to the previous month’s data point of 9.72% YoY. |
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Outlook
Though RBI is unlikely to cut key policy rates in the short term unless the global and domestic macro scenario deteriorates further. Food Inflation is showing signs of cooling off, thus overall inflation could moderate. The rise in
G-sec yields may be capped as slower bank credit creates headroom for banks to increase investment in G-Secs. Also, softening inflation over a period of time and RBI’s announced and further OMO action towards the later part of the year may provide support. RBI’s baseline projection for WPI inflation for March 2012 has been kept unchanged at 7%. Elevated inflationary pressures are expected to ease from December 2011 though uncertainties about sudden adverse developments remain. It is expected to moderate further in H1FY13. The major concerns for the market remain high inflation and higher government borrowing due to the deteriorating fiscal deficit. The market is not expecting inflation to come down significantly in the near future and the same is reflecting in the sustained higher yields on short-term papers.
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