|
A look at 2012 and way ahead
As we look ahead for the next year, the glow of last year's performance definitely adds a positive bias to any prognosis. The
year 2012 began with much gloom and doom as nothing seemed to be going in the right direction. Reforms seemed to have
become a non-issue, globally. The situation in Europe was continuing to deteriorate and in the US, a presidential election was
causing more uncertainty about the economic future of the world's biggest economy. Most pundits were unanimous in agreeing
that the outlook looked bleak. However the events of the past year have been quite contrary to the prognosis with the BSE
Sensitive Index of 30 companies posting a return of 25.7% during 2012 (as at 31 December 2012; Source: Bloomberg);
beating almost all asset classes for this period. All other stock market indices also posted healthy returns.
The debt markets provided a steady return on a one year basis but extraordinary returns which could have been fueled by a
sharp drop in interest rates did not materialize. Inflation remained stubbornly higher than the comfort range specified by the
RBI and industrial production and the GDP growth rate underwent several downward revisions throughout the year. A late
reform blitz in the form of policy initiatives coupled with almost USD23 billion of FII inflows propelled the market in the second
half.
What should one expect for the next year? Clearly the government appears committed to furthering the reform agenda.
Inflation, despite the best efforts of the government remains concernedly high. The fiscal deficit may post a much worse actual
than the budgeted figure and interest rates remain distressingly high. The logical conclusion here is a difficult year ahead for
most investors.
The Positives
While the negatives are quite pronounced we should spend some time on what can be the positives at this time.
Reforms: A pro-reform bias shown by the government should lead to correcting some of the fiscal imbalances in the system. If the reform bias helps in reducing these biases, we could be quite hopeful that the Indian market can be led into a secular bull market from here. However one must understand that correcting fiscal imbalances will require enormous courage to effect unpopular changes to the subsidy structure of this country. Moving forward on land acquisition and clearances issues involve tremendous challenges to any political organization. This on the whole will not happen in its entirety given an upcoming general election. Capital Flows: International capital flows have been very strong this past year and a continuation of the same is based more on hope than a real possibility at this time. This is due to the fact that apart from being the best performing emerging market of significant size this last year, other economies are expected to improve on the back of renewed hope of a global uplift in GDP growth rates driven by the US. Thus on a valuation basis the India story does not look that attractive. India continues to remain one of the most expensive markets on a P/E basis across the emerging markets. Interest Rates: Lower interest rates could be possible if inflation starts to reduce. This, in the intermediate term, is a strong trigger to equity market performance. However if the drop in interest rates is lower than expected or the same does not translate in higher investment in capital expenditure or higher credit off take, the same will not be effective. This may lead to a rally in the debt markets but may not spread to the equity markets. Corporate Earnings: Corporate earnings growth is expected to recover in the next fiscal year on the back of lower commodity costs and lower foreign exchange related movements. Interest costs too should come off in the next year compared to last year. However a 13-15% growth in earnings will not necessarily lead to a dramatic increase in the equity price levels, given that the market has already returned close to 25% last year on low teen earnings growth for FY13. Thus earnings growth too is not expected to be a big trigger for equity market returns this year.
So where is the upside?
With the current economic climate it appears unlikely that the markets may provide more than low teens returns for the next calendar year. This will mean a new high for the equity market, but the momentum may not be there to support this performance from creating an upward move from there. The last peak of the BSE Sensex was seen in early 2010 at a level of 21004 on 5th November of that year and the market had seen a peak level prior to that in the year 2008 at 20873 on 8th January. We expect that these levels will possibly be broken upward in 2013.
The opportunity beckons from a valuation perspective. While we do expect the broad market to produce tepid returns next year we do not think that all stocks will remain in this range. There is big gap in valuation between cyclicals and defensives. While 2012 narrowed this gap a little, some companies continue to show deep undervaluation. We expect the natural phenomena of mean reversion, seen in most markets, to be strong this year. While we do not expect a sharp de-rating in expensive stocks such as FMCG and private sector banks, for example, we do see a sharp upside to certain beaten down sectors in engineering and capital goods.
Outlook
We expect the second half of the year in the broad markets to be driven by two major events.
Firstly, the expected outcome of the general election:
With increasing uncertainty about the outcome of the elections, the market may give up some of its gains toward the end of the year and the eventual outcome will of course determine the direction of the market for some time.
Secondly, whether the reform initiative yields results:
If it does, the equity markets will sustain their highs, if not, we can expect a drop in the equity market levels as a result.
Investors should be best served by allocating their assets next year in a judicious mix of assets across equities, fixed income and others rather than rely solely on any one asset class to deliver the best returns, their risk appetites notwithstanding.
Happy investing!
Disclaimers
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
The article is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. Investors should understand that statements made herein regarding future prospects may not be realised. The views expressed in the article are personal views of the author and do not necessarily reflect the views of HSBC Asset Management (India) Private Limited or any of its associates. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Asset Management (India) Private Limited. HSBC Asset Management (India) Private Limited; 16, V. N. Road, Fort, Mumbai 400 001. Tel: 6614 5000. Email: hsbcmf@hsbc.co.in.
|
