The market?s performance may get worse before it gets better in 2012 says Jyotivardhan Jaipuria, MD and head of Research, BofAML. In an interview with fe?s Devangi Gandhi, Jaipuria points out that concerns over the slowdown in the economy may further weigh on the Indian equity market before possible rate cuts by RBI triggers a rebound.
What is your outlook for 2012?
We see more pain coming in through the slowdown in the economy and its impact on corporate earnings before things get better. Though inflation may not be that big a worry this year, unlike the beginning of 2011, an economic slowdown and corporate earnings are likely to surprise on the downside. Muted corporate spending and lower capex are likely to weigh on the GDP growth which in turn would decelerate earnings growth. As a result, earnings downgrades which have sustained throughout the year are expected to extend for a few more quarters.
However, we see RBI shifting its focus to growth from inflation and signalling rate cuts from April 2012 ? our house view being a 100 bps cut between April and July ? which could lead to a sharp rally depending on expectations.
Overall, we see another choppy year for the market with the wider range than that in 2011. The market could bottom out after a 10-12% downside from current levels and 2012 could end with a positive gains of close to 15%. The Sensex EPS for FY12 is expected to settle somewhere near R1,110 while for FY13 it could come in close to 1,200.
How do you see FII flows shaping up this year?
In 2011, the total outflow from emerging market equities was nearly $40 billion. India accounted for less than $1 billion of outflows even after being the second worst performing markets with a loss of 35% in dollar terms. If we consider $29 billion of FII flows in 2010, we can say that in the last two years they have remained net buyers. In the absence of sharp selling in 2011, the India weight has gone up.
Since FIIs weigh news flows across markets, if the news flow in India is positive, in terms of interest rate cuts and some policy reforms, the investment may come back. However, the slowdown the in economy in the near-term could keep flows in check. The absolute amount of FII allocation depends on their global positioning, their relative weights for equity as an asset class, and the allocation across emerging and developed markets.
What are your expectations from the December quarter results?
They are likely to be more or less a continuation of what we saw in the previous two-three quarters, margins could remain low and under pressure with toplines starting to come off a bit. Earnings are expected to be sluggish and disappointing, with the earnings growth for the Sensex companies below 10%. Software producers, for whom the quarter is generally sluggish, could benefit from the rupee depreciation along with pharma companies. The woes for infra-related sectors may continue and so may the NPL worries for some banks.
FMCG firms are currently trading at very high valuations. Can this sustain?
FMCG companies are trading at higher multiples because of lack of options for investors. A substantial correction can happen in these stocks when people start churning their portfolios in favour of interest-rate sensitives. These stocks could also correct in case of a further slowdown in rural incomes or if excise duties are upped for some categories in the Union Budget.
