>INVESTMENT VIEW: Outlook 2012 (ING INVESTMENT MANAGEMENT INDIA)

Rocky Path to Recovery

Executive Summary


Indian equity markets were weak even before the global sell-off commenced in August, and have since followed the regional correction. On a year-to-date basis, this has made India one of the worst performing equity and currency markets in Asia. While the earlier weakness was as a result of India-specific factors (growth weakness, stubborn inflation, reform paralysis, and governance scandals), the latest bout of weakness can best be explained by acute global risk aversion. However, despite the accumulation of headwinds in recent quarters the economy's resilience has been impressive, particularly in the services and trade sectors. Despite the high inflation and rising interest rates, consumption demand remains stable and India’s rural economy remains on a solid footing.


However we expect headwinds from global conditions and lagged implications of domestic policy tightening are likely to lead to slower growth in the quarters ahead. The next couple of quarters will be crucial and any likely pick-up in project execution (aside from the interest rate dynamics) could be crucially linked to the sentiment factor. The government thus, on its part, needs to move ahead with reform measures. Nevertheless, we believe that part of the investor concerns in relation to lower growth and a lack of project execution are now priced in, as evidenced by India’s sustained underperformance versus other Emerging Markets since the beginning of the year. As such, we expect a combination of monetary and government policy action to bring some confidence back and to help capex growth momentum into the second half of financial year 2013.


With the exception of a further sharp rise in oil prices and a potential runaway increase in already elevated commodity prices, we expect to see a gradual recovery in the domestic macro situation as we head into the second half of financial year 2013.


Equity Outlook
In this backdrop, we believe equity markets will mirror the economic recovery. We expect inflation to come down to ~7.5-8% levels by March 2012, post which we expect Reserve Bank to start the monetary easing which should drive the economic growth. We expect market recovery to be back ended and should see Sensex inching up only by latter half of the next year.


Fixed Income Outlook
As far as interest rates are concerned, both domestic as well as international factors indicate towards a bullish bias. Domestically, slower GDP growth combined with fall in inflation may cause RBI to cuts interest rate in Q1 or Q2 of FY2013. At the same time slower growth in the Emerging Markets along with any shocks coming from the Euro zone countries due to the sovereign debt crisis may lead to continued lower interest rates of safe haven economies. This presents a very attractive opportunity for investors in fixed income markets with a time horizon of 6 months or more as there could be a sharp fall in interest rates in the next 2 to 3 quarters. However, in case fiscal deficit continues to be high or if there is a sharp upwards movement in commodities prices globally, the fall in interest rates could be moderate.


To read the full report: OUTLOOK 2012
RISH TRADER