Thursday, 19 January 2012

2012: The year of new normals



The year 2011 was the second-worst for the BSE Sensex since 1980. India also turned out to be the second-worst performing market among the Asia pacific emerging markets in 2011. This was a year when the resilience of the Indian economy got challenged by both internal and external factors.

That said, the bulk of the pain was self-inflicted. The correction in the markets in the last quarter was more due to India-specific issues, such as lack of policy measures, corruption, and monetary tightening. Moreover, GDP growth continues to slow down. Meanwhile, foreign investors are increasingly concerned about the mid-term direction this country is taking with increasing susbidies and populist measures.

We believe that going forward, markets will reconcile to a lower trend growth rate- and settle at 6.5-7%. This could be the new nromal for growth and, by global standards, is not a bad number at all. We expect inflation to come down this year- it could average around 7%, leading to a nominal growth of 13-14%. That would lead to corporate earnings growth of 15%. Meanwhile, the rupee has weakened significantly this year, and we expect 50 levels to be the new normal. Exporters will benefit big time from this rupee weakness.

We expect growth to bottom out in Q1CY12, at 6%. Corporate earnings should also bottom out around this time. We expect the RBI to start easing the monetary policy, with a potential repo rate action on January 24 itself. Going by history, equity markets typically bottom out around the time when interest rates peak out. We expect markets to bottom out in Q1CY12 itself.

Globally, things are not as bad as perceived in August. In the US, there is no double-dip. In Europe, the endgame will require the European Central Bank (ECB) coming into play, which, we believe, will happen sooner than later. We expect equity market returns of 20-25% , backed by 10-15% earnigs growth and a P/E re-rating from 12x to 14-15x once growth bounces back to 7%.

Varun Goel
Head-PMS
Karvy Private Wealth

No comments:

Post a Comment