Equity Outlook
06th January, 2012
Atul Kumar- Fund Manager (Equity)
Equities continued their weak run in December 2011 as the BSE Sensex fell by 4.2% (on total return basis) while the BSE 200 and BSE 500 indices corrected even more sharply. A high inflationary environment, slowdown in the domestic capex cycle due to rise in interest rates, corruption scandals leading to a policy paralysis as well as sovereign crisis in Europe which resulted in reversal of flows from emerging markets, have all contributed to a weak 2011 for Indian equities, with the BSE Sensex falling by 23.6%.
IT and FMCG were the two standout sectors while Capital Goods, Real estate and Metals saw the most value erosion. A depreciating Rupee has worked in favour of IT stocks, while the defensive nature of the underlying FMCG business has driven its exceptional performance as investors sought its relative safety in an uncertain world.
Surprisingly, despite a weak equity performance for the month, FIIs remained net buyers, purchasing $31.5 million worth of equity investments. Overall however, FII’s have been net sellers of $357.8 worth of equity stocks for calendar year 2011. Domestic mutual funds have remained the net buyers in 2011, investing $1.35 billion in 2011.
A high interest environment has taken its toll on the economy with the mining, manufacturing and constructions sectors showing a sharp deceleration in growth rates. However, given the significant domestic headwinds as well as stagnating global economy, the overall GDP of 6.9% for the 2nd quarter of the current fiscal is still commendable. Recent statements by the RBI suggest that the rate tightening cycle may be over and 2012 would see an ease in interest rates, as improving growth rates assumes priority.
Indian equities continue to look optimistic in the long run. Inflation is already on its way down and the RBI’s statements imply that we may start seeing interest rates come down as well. Despite the problems plaguing the western world, the Indian economy remains quite insular in nature, and looks poised for another expansionary phase. The correction in 2011 has made risk reward far more favorable and investors are likely to gain by remaining invested in the long term.
Note: The source for the above information is Bloomberg and RBI.
Disclaimer:
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