After a spectacular 2010, the year 2011 proved to be quite horrendous for equity investors in India. Not only did India’s equity benchamrk indices underperformthe developed markets, but it also fared poorly compared to its emerging market peers. In fact, while key emerging market indices fell 10-20%, the BSE Sensex and the NSE Nifty fell nearly 25%.
Retail investors were badly hit because their portfolios are largely mid-cap in nature, and the fall was more pronounced among mid-cap and large-cap stocks. In 2011, the BSE Mid Cap Index fell sharply by 35% whereas the BSE Mid Cap Index plummetednearly 43%. On the other hand, the US markets were one of the better performers of the year, closing on a flattish note.
On a sector-specific basis, sugar, realty, capital goods and metal stocks were the worst hit, sharply declining by more than 40% Y/Y on average in 2011. The next in line were power, energy and banking stocks, which fell 30-40% Y/Y. In fact, mid-cap stocks in all these sectors fell far more sharply, severely eroding investors’ portfolios. Capital goods and infrastructure stocks extended their losses from last year, given the high interest rate scenario, policy inaction from the government and GDP growth slowdown. Even banking stocks were not spared as the RBI went in for some aggressive monetary tightening even as credit growth failed to meet market expectations, with companies putting capex plans on hold.
Given the severe volatility in the markets, it was the year for defensives, such as FMCG and healthcare. Of course, while the BSE FMCG Index was the only one that clsoed in the green, BSE Healthcare was down nearly 13% for the year, although it far outperformed the key benchmark indices. Other notable outperformers included cement, telecom and auto.
On a stock-specific basis, companies with external commercial borrowings (ECBs) faced the brunt of investors’ ire as the rupee depreciated sharply. Likewise, companies with high debt burdens were weeded out of portfolios as the economic environment turned increasingly adverse. More importantly, companies with corporate governance issues (and there were quite a few of those) were immediately dumped.
The Indian equity markets were influenced by the following factors in 2011:
• The positive macroeconomic data from the US led to significant FII outflows in early 2011 even as India was reeling under severe inflationary pressures.
• High inflationary fears in emerging markets like India promoted the RBI to go in for aggressive monetary tightening.
• India faced severe supply-side food inflationary pressures. This has become more of a structural issue in the backdrop of changing lifestyles and dietary patterns, both in urban and rural areas.
• The Arab Spring saw crude prices breaching the US$100-per-barrel mark. For a country that imports 80% of its crude requriements, this had an economy-wide cascating effect.
• The aggressive monetary tightening by the RBI in mid-2011 continued to roil markets even as inflation continued to be at stubbornly high levels.
• The Greek debt crisis once again reared it ugly head, sendign markets in a tailspin.
• As if political standoffs in Europe were not bad enough, we saw the same happening in the US in July when it came to the question of raising the debt ceiling. The resultant volatility in the markets and the subsequent US credit downgrade by S&P’s saw global markets reacting sharply.
• Thereafter, the rupee witnessed a significant downfall, dropping nearly 20% since August, as FIIs made a beeline for the door. Compared to 2010, when FII net inflows were a staggering Rs. 133,000 crore, this year we actually witnessed net outflows of Rs.2,700 crore.
• The last quarter of 2011 saw heightened risk emanating from the Euro-zone, with fears of cotnagion spreading to bigger nations like Spain and Itlay. The high-beta markets like India fell sharply on this news as global risk aversion heightened.
• Even as leaders in Europe came together to sort out the problems in the region, Indian markets continued to fall because domestic factors began to play an increasingly greater roel by the last quarter of 2011. This was particularly related to policy inaction as the political establishment failed to make any headway on key issues.
• As the year drew to a close, there was a slew of negative macroeconomic data, including slowdown in GDP (particularly capital goods), and visible slowdown in consumption demand and corporate profitability. Meanwhile, the rupee continued to depreciate sharply.
• More importantly, the current levels of the Indian markets have also factored in some of the domestic negatives expected in 2012, including the fiscal deficit going out of whack, possibility of rupee depreciating further, corporate profitability slowing down and reforms taking a backseat.
In a nutshell, it has been a terrible year for the markets, with stocks falling across the board. As we enter 2012, there is a view that domestic factors will play a greater role to influence markets this year. With significant headwinds on the horizon, it will be interesting to see if our leaders can put their differences behind them and move ahead. Likewise, markets will be closely watching to see whether the concerted efforts of the Euro leaders will be able to bear fruit.
Satyan Nair
Managing Editor
The Finapolis
Karvy
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