Saturday, January 7, 2012

>Global recovery looks more prolonged in 2012 / Twin Pillars of Emerging Markets / Sectoral Outlook 2012

Recovery in advanced economies is likely to take longer time than initially anticipated. Forward looking indicators like Purchasing Managers' Indexes ( PMIs) have been declining; though there was a marginal uptick in case of the manufacturing sector in the U.S. where better prospects of recovery have been further reinforced by early Christmas Retail Sales data and a drop in the Unemployment Rate. By contrast, the European PMI has slid down to contractionary level providing strong indications of a recession in Europe in 2012.

In view of the prolonged slowdown in developed economics, reduction of debt levels would entail structural measures which, in some cases, may not be politically expedient. Both the indebted and the bailing-out' countries have to overcome some political resistance to take steps towards effective resolution of the problem and prevent credibility from weakening. In this scenario upcoming policy decisions are going to be the key towards the global economic outlook.

After the recent EU summit which has failed to reverse the negative market sentiments, European governments are likely to make a big step towards fiscal integration soon and that the U.S. Congress extends most of this year's stimulus. Failure on these fronts would risk a full-blown recession, with global GDP growth falling below the 2.5 percent recession threshold.

In case of emerging economies, policy tightening (as inflation has been a major concern in 2011) and falling external demand moderate economic activities In China GDP growth number is likely to come at around 9 percent YoY in 2011 against an average of 10.5 percent during 2000–07. In 2012 the scenario is unlikely to change much as global slowdown, domestic housing market weakness and limited room for policy stimulus will lead China towards registering a second year of below-trend growth in 2012.

As we enter the NEW CY12 with lot of negative developments in CY11 and sharp correction in markets, we strongly believe that the ‘negatives’ are at their peak or near peak on the domestic economic front and corporate performance are at their bottom or near bottom The word ‘near’ should be read with a margin of safety for a quarter from where we may see reversals in bottom. near quarter, domestic macroeconomic and corporate performance. Fall in Inflation may prompt cut in interest rate, as indicated by RBI, IIP numbers may improve and corporate earnings may brighten from 2nd quarter of CY12. The major risk remains on the political front with elections in 5 key states, the result of which may determine the fate of the government and their reforms agenda.

We give less Weightage on global front, even though the chances of deterioration of global macroeconomic factors led by Euro Zone and US are higher which may create volatilities across asset classes. The reason we give less Weightage on global adverse developments’ impact on Indian market is because Indian markets have sharply under-performed Global markets, hence further downslide on adverse global factors looks minimal for Indian markets. But among the adversity, we may see prosperity as the rising crude oil price trends, the single most factor which remains a major risk to India’s growth may correct, although there are fewer indications of the same in the near term due to escalating tensions between US and Iran

On the earnings front, we expect 14% and 16% growth in Sensex and Nifty Earnings respectively for FY13 (E), with EPS of 1320 and 410 respectively. Nifty at close of CY11 was trading at 13.6xFY12 earnings and 11.60XFY13(E) Earnings estimates. Nifty is trading 19% discount to 10 year average PE and 30% discount to 5 year average forward earnings. This gives us confidence that the Indian market is likely to swing higher rather than going lower from current levels, unless there is further damage in fundamentals which may call for more downgrades on earnings. We expect the Nifty to trade between 4500-5950 levels in CY12, with a probable uptrend in the second half of the CY12 on factors mentioned above. The INR may trade between 48-54 in CY12 with more bias to settle down around 48 towards end of CY12. We may see FII flows to pick up this year, as they are not only poised for higher returns on compelling Equity valuations, the INR appreciation may further boost their returns from Indian markets.

Twin Pillars of Emerging Markets

India and China registered Manufacturing PMI ( Purchasing Managers Index) value of 54.2 and 50.3 respectively for the month of Dec 11’. In CY2011 India’s PMI has outperformed China in
11 out of 12 months.

To read the full report: OUTLOOK 2012