Sunday, December 25, 2011

>INDIA STRATEGY: The Year That Was: All About “Cs” i.e. Crisis, Corruption, Currency slides, Cut in earnings and growth, Cost of living rises...

Our customary year-end note highlights how challenging 2011 was – a year equity investors will want to forget quickly. It is ending as the second-worst in India’s history (after 2008). Investors faced the following 11 “Cs”, or Challenges, of 2011.

C - Central bank tightening – Rates at multi-year highs
C - Crisis in Europe
C - Corruption scandals occupy headlines
C - Costs rise faster than revenues – Corporate earnings hurt as margins drop to lows
C - Compression in multiples causes equities to deliver negative returns
C - Cold Storage for policy action
C - Cost of living rises – inflation proves too stubborn
C - Consumer stocks outperform
C - Currency slides to all-time lows
C - Capex tumbles along with corporate confidence
C - Cut in earnings and growth is sharp and consistent

The Year That Was

• India is likely to end the year as the second-worst-performing emerging market (out of 21). This is the second-worst yearly performance after 2008.

• Consumer Staples and Telecoms were the best- and worst-performing sectors for the year. Interestingly, the top four performing sectors (Consumer Staples, Consumer Discretionary, Technology and Healthcare) of 2010 interchangeably retained their top four positions in 2011.

• FIIs were marginal sellers of Indian equities, while domestic institutions were strong buyers during the year.

• Trading activity was marked by strong volumes in derivates markets (at record levels), even though the cash turnover fell to a seven-year low, and, compared with % of market cap, it was at its lowest level in history. The share of options trading to total derivatives trading climbed to 75% vs. 68% in 2010 and 52% in 2009.

• Market breadth and depth were weak during the year, while hedging activity ascended to a decade high. Implied volatility picked up in the second half of the year.

• Through the year, less than 20% of the stocks were trading close to their 52-week highs, and the number fell to less than 5% by the end of the year. The share of Sensex turnover to total turnover rose for the first time since 2008 to a three-year high.

• After a tough 2010, domestic fund managers received inflows in their equity as well as fixed income funds.

• India’s absolute P/E multiple fell to 2009 levels, although on relative valuations India is trading above 2009 levels.

• Consensus has revised down F12 Sensex earnings growth by 7.5 ppts since the start of 2011. Similarly, earnings revision breadth remained negative throughout the year.

• The yield curve narrowed during the year, with the 91-day and 10-year yields rising to multi-year highs, influenced by steady rate hikes by the central bank and growth scare. Also, the rupee depreciated to all-time low levels.

• India’s macro looked worse than that in 2010, with elevated levels of inflation and slowing growth (IIP).

To read the full report: INDIA STRATEGY