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March 2011

The domestic equity markets started the year on the cautious note and the sentiments were hit severely during the month of January. The S&P CNX Nifty lost 10.2% during the January month and ended at 5506. The benchmark indices have significantly underperformed their emerging market as well as developed market peers. The concerns on rising inflation and effects of political turmoil on oil prices weighed on the investor sentiments. Heavy selling by FIIs also dragged the markets down during the month, the net FII outflow stood at Rs 6,330 cr in January.


Interest rate sensitive realty and auto sectors were the worst hit during the month. The high beta realty stocks were severely affected and the BSE realty index declined by 22%. In addition to the rising interest rates, the high commodity prices leading to margin pressure weighed on the auto stocks and the BSE auto index declined by 13.1%. The BSE Oil & Gas index declined 10.6% led by the market heavyweight Reliance Industries which declined by 13.1%.

The results announced till date show a mixed trend for Q3 FY11 season. Infosys kicked off the result season with decent performance albeit with a weak guidance for the next quarter. Most of the large cap IT stocks put up a decent show however, there were no signs of pricing improvement. Capital goods giants BHEL and L&T posted strong growth numbers though the lower order booking for L&T weighed on the stock. While Reliance Industries results were in line with market expectation, ONGC results exceeded expectations.

Looking at the sentiments in equity market, there is a sense of gloom which is in stark contrast to the exuberance witnessed in early November. Undoubtedly, the macro picture has deteriorated and there are dark clouds looming on political and economic front. Of late, watching and reading media reports are quite depressing, but as history has shown, our politicians may not deliver out of conviction but have never failed in delivering out of compulsion. And there are compulsions today. Recent clearance of POSCO project after being held up for a very long time by the environment ministry is one such sign. We also believe that events in Egypt or hyper-noise in India about the corruption issues would lead to structural changes in governance standards. Apart from these events, politicians would be taking note of the verdict in recent state elections and importance of growth and governance in our electoral democracy. There is extremely limited maneuverability on the fiscal front; however, we expect the government to use this as an opportunity to re-iterate its commitment on the reform agenda. Foreign investors poured in $ 29 billion last year and we highlighted the risk of some of the money moving out. However, we believe that domestic investors would return to equity markets at lower levels as relative attraction of real estate and gold fades. Indeed, higher interest rates would lure investors towards safe deposits; one must not forget that timing the investment in equity market is easier said than done. The long term fundamentals of Indian economy remain absolutely intact. Favorable demographics and changing social and cultural fabric, potentially large investment in infrastructure, opportunities in manufacturing, rising disposable income and consumption levels have been some of the key themes driving markets over the last decade. Most of these ‘stories’ are very much intact. Till few months back, markets were pricing in all the possible positives with the economy and individual companies while ignoring any risk. But over the next few months, fear is likely to overtake greed as markets would price in every possible bad news. Surely, corporate earnings growth will take a hit but what we need to assess is how much of it is already in the price. Most important thing for investors is valuations and we believe that large part of froth has been taken away and as markets focus more on near term macro, great long term opportunities are emerging for a patient investor.

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