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Equity Outlook


March 2010



The financial year 2009–10 was a historical year from the perspective of global economic turnaround. Data points on improved consumer spending and revival in industrial activity gave support to the thesis that the worst is now behind us and global economy is back on the growth path. Global stock markets rose between 60-100% from their lows in March '09 as a result of this optimism. However, global economy continues to swing between hopes of revival and fears of uncertainty. Fears of sustainability of the recovery and impact of withdrawal of stimuli on the entire recovery process continue to linger. Continued high unemployment rates in several economies, rising debt and fiscal deficit levels of developed economies, poor credit offtake and rising commodity prices are some of the key concern areas.

For the quarter, both BSE Sensex and NSE NIFTY ended flat with returns of 0.4% and 0.9% respectively. However, Mid caps and small caps performed better than large caps with NSE CNX Midcap Index up by 3.7% and BSE small cap index up by 1.7% during the quarter. Indian equity markets performed better when compared to the Asian peer group with HangSeng Index down - 2.9%, Shanghai Composite index down -5% and Taiwan Index down – 3.3%.

However, numbers hide the volatility witnessed within the quarter in India. The quarter can be distinctly divided into two halves – 1st January to 25th February (pre-budget) and 26th February to 31st March (post-budget). Pre-budget, Sensex and NIFTY were down -6.9% and -6.6%. During this time, FII flow was negative. Post budget, Sensex and NIFTY were up 7.8% and 8% respectively. This rally was fueled by massive FII inflow of $ 3.3 bn.

The rally post budget was primarily driven by positive announcements made by the finance minister in the budget. Steps such as increased allocation for infrastructure spending and social sector, reduction in effective direct tax rates leaving more money in the hands of consumers, government borrowing and fiscal deficit within manageable levels, went down well with market participants. What also helped was that global concerns regarding Greece receded in the second half of the quarter leading to renewal of funds flow into equities as an asset class.

With inflation at double digits (WPI Inflation for February end was 9.9%), it had become pertinent to contain inflationary expectations as the current inflation is seen not only in food articles but also spreading to non-food articles and this is expected to remain so as international commodity prices inch higher and domestic demand remains strong. While the Industrial production rose by 15.1% y-o-y in Feb. 2010, there has been a month-on-month decline in both Jan. and Feb. Therefore, sustainability of this growth momentum will be key to a pick-up in credit offtake going forward. The interest rates are expected to remain firm which could impact growth momentum going forward.

December 2009 – quarterly results for most companies were in line with the expectations barring some exceptions. March quarter is also expected to be good as most of the sectors are likely to witness a strong volume growth because of the low base of last year. But most sectors will face challenges on the margin front because of cost push pressure and steep INR appreciation.

During the quarter, the global financial market witnessed fears of default by the Greek government, a gentle reminder that even minor shocks can create large vibrations in the world of financial market, making the entire recovery process look fragile and volatile. Greece's fiscal position was worsening and it was being feared whether the country would be able to honour its loan repayment obligations. To make matters worse, Greece is a member country of Eurozone and its fiscal problems were raising question marks on the sustainability of the concept of Eurozone itself. This fear of uncertainty caused ripple effects across the entire global financial asset classes including bond markets, currency markets and equity markets. Another concern is the sustainability of China's growth rate. China with its spectacular growth over the last two decades has surprised in the past and continues to surprise even now. But the recent newsflows i) Chinese government planning to curb lending by state banks and ii) increasing pressure on China to appreciate its currency, could lead to a slowdown in the Chinese economy growth rate which, if not managed properly can have a spillover effect on the global economy.


Global growth recovery is still in its nascent stage and we may witness a period of sub-par growth, particularly for the G-7 economies for the next couple of years. The contraction in 2009 was deep and the recovery is expected to be slow. Since G-7 economies constitute 55% of the world's total GDP, weakness in these economies will cause the global growth to remain subdued. The pace of global recovery and liquidity will continue to influence commodity prices and the general price levels. Globally, commodity prices have run up quite significantly in the recent past. For a developing economy like India, with increasing import dependence to take care of its rising demand, this could be a cause of concern.

The Indian economy is certainly looking a lot better. Employment outlook has turned positive, consumer discretionary spending is improving, housing market is witnessing a precipitous recovery and industrial sector is looking to expand again. Earnings growth for Q4FY10 is expected to be good, in spite of margin pressures on account of higher raw material prices and the steep INR appreciation. Most of the sectors will enjoy their last quarter of low input cost and high margins before new contracts at high prices kick in from April onwards putting pressure on margins.

Though it appears that the growth momentum for India has picked up once again, certain headwinds remain. There are certain factors which can derail the growth path and/or valuations of the market. A below-normal monsoon (for the second consecutive year) can have serious impact on our economy. Rising crude oil prices, which has touched 85$/bbl will also lead to negative consequences for economy as a whole. High inflation along with policy measures of raising interest rates may impact the growth prospects of the economy. And last but not the least, global headwinds, which can cause serious damage to global recovery and hence seriously impact FII inflows to emerging markets like India.


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