Sunday, February 19, 2012

>STRATEGY: Rally Reality – 30% in 33 days! Seen it before?

 30% in 33 days! Seen it before? — Actually Yes. This rally – 33 trading days so far, and currency adjusted - only makes the middle of the 5 big rallies in the last decade. It is however clearly a very impressive rally: leader in local currency (+20%) and currency adjusted terms (+30%) amongst large EM/DM markets, India’s strongest USD rally vs. EMs, and more broad-based (i.e. mid/cap and Small cap participation) than the index’s performance would suggest. All this is good (and past), so we look closer at the reality of this rally, and (more importantly) question how real it is.

 The Reality of this Rally — How does this rally stack up against the previous 5 rallies? It is a) more broad-based (relative mid-cap/small cap performance is second best) b) starting from a relatively higher valuation (1yr fwd PE: 12.6x – second highest; range:9x-16.5x) c) Outperformance is led by the usual sector suspects (Materials: 16%, Industrials:10%, Financials: 8% and as always d) has been led by strong foreign Inflows, though this time there has been aggressive domestic selling (almost 50% of foreign buying). Not enough to say its ‘different this time’, but there are differences.

■ Real? Will it Rally on? — India’s had a few false starts - (11/21 15%+ rallies have petered out. But the four that have lasted 100 days have generated a 48% median local currency return (55% averages) and volumes have gone up sharply (86%). So far, the domestics haven’t even participated; equities worldwide continue to rally , and Citi’s Global and EM strategist expect the equity rally to go on:+11% for global equities, +15- 20% for EM, from here. Will India continue to lead the rally, or at least rally along?

 Fundamentally, we believe India's fair value is now near — The Indian market, at 18,154 on the Sensex is almost at our fundamental December 2012 target of 18,400. We are holding our target. We would continue to position our portfolio relatively aggressively and for risk (and stay away from defensives): see overshoot risks on the upside rather than the downside. But we believe the markets’ move now prices in a quickly recovering economy/corporate sector; this will likely take time (3/4QFY13), and the market will likely wait for most 2012 for the economy to catch up.

To read the report: RALLY REALITY