With the Reserve Bank providing rather clear indications that it could finally give in to the clamour for a rate cut in its upcoming policy review on January 29, the new year could herald more cheer for investors.
Sectors likely to benefit from the fall in interest rates and consumer-oriented businesses are likely to be in pole position to capitalise on the impending rate cut. These are, therefore, likely to be at the forefront of the potential rally on the bourses in the coming weeks, which could set the tone for secondary market activity early into 2013, coming on the back of an extremely favourable, albeit volatile 2012.
The basis for optimism is this. Even as the markets have rallied sharply since the middle of this year, valuations continue to look attractive on a historical basis. The BSE Sensex trades at close to 16 times estimated earnings, compared with 11.6 for Brazil’s Bovespa, 9.6 for China’s Shanghai Composite and 5.5 for Russia’s Micex, according to Reuters data for the first week of December.
THE FII FRENZY
Despite the sharp slowdown in the Indian economy this year, the benchmark 30-share Sensex has surged over 25 per cent till mid-December this year on the back of strong buying by foreign institutional investors and optimism surrounding the government’s reform efforts.
During the current year, FII inflows of slightly over $22 billion drove up share prices sharply, compared to a 22 per cent dip in 2011. The surge in the benchmark equity indices came about despite sluggish factory output front, recalcitrant inflation and continuing bad news on the twin deficits — fiscal deficit and the current account deficit.
The broad consensus is that in 2013, the market rally is expected to be based more on expectations of a sharp improvement in the macroeconomic indicators — driven by the impending rate cut, rollout of more reforms and recovery in the broader economy — than on the prospect of improvements in the corporate profit growth on the ground.
This is buttressed by the trend this year, when the index recorded a 25 per cent gain in the last 12 months even as the trailing twelve-month earnings of the companies constituting the BSE Sensex grew at a subdued 8 per cent.
Apart from the rate cut and reform theme, which is widely expected to seen gainers in consumer sectors such as FMCG, banking and retail, many analysts are getting more specific on individual stocks. Brokerages such as Bank of America Merrill Lynch have said they are overweight on rate sensitive sectors like autos (Maruti and Tata Motors), telecom, financial sector (ICICI Bank, HDFC Bank), pharma (Lupin and Glenmark) and real estate (DLF).
On the other hand, the sectors that took a beating during the current year, including businesses with big global operations and those sensitive to a depreciating rupee such as IT, power, metals, and oil and gas underperformed the benchmark indices, could be under pressure the next year as well.
Foreign investors, who have been key drivers of the Indian stock story in 2012, even as domestic heavyweights such as a LIC choose to take a contrarian view and book profits, are likely to stay invested in India in the coming months and the level of optimism among is projected to spill over into 2013. According to data from Standard Chartered, Asia is likely to see foreign inflows of $42 billion in 2013. While gains are broadly expected across emerging economies in the region, the bank is betting on India, along with Philippines and Thailand, to be 2013’s star performers, each offering returns of 15 per cent next year. In the next year, the bank forecasts that stocks will get a boost from interest rate cuts by the Reserve Bank of India, which will reduce the cost of capital and support investment growth, and from easing inflationary pressures — a positive for profit margins.
According to Sebi data, the net investment by FIIs during 2012 (updated till December 14) was $22.22 billion (Rs 1,16,550 crore), making this the second highest net inflow in a single calendar year since foreign investors were allowed into the Indian capital markets in 1992. In 2012, FIIs had pulled out $358 million (Rs 2,714 crore). The FII push has ensured that the BSE benchmark Sensex shot up by 3,862 points or 25 per cent during the current calendar year.
FII inflows were clearly helped by the flurry of policy initiatives announced by the Government post-September and newer measures, including the changes to the banking legislation and the new companies Bill, would act at catalysts.
Even as the benchmark indices delivered robust double-digit returns over the year, there was perceptible divergence between the returns delivered by individual stocks in the same sector. While some stocks managed to outperform the broad market, others barely participated in the rally. According to experts, the big gainers of 2013 are likely to be sectors that did well this year as well. These include banking, FMCG (fast moving consumer goods), consumer durable and realty. The BSE Bankex Index surged 55 per cent in the last 12 months, sharply higher than the 32 per cent gains for the CNX PSU bank index. Among banking stocks, the big gainers were private sector banks, notably Yes Bank, Axis Bank, ICICI Bank and HDFC Bank, even as public sector banks trailed their private counterparts.
In the consumer durable space, the returns were more widespread, with Whirlpool among the big gainers. The BSE Consumer Durable index registered gains of 49 per cent while the BSE Realty index surged 49 per cent in 2012. In case of real estate firms, stocks of low leverage companies such as Prestige Estates (127 per cent) and HDIL (117 per cent) saw strong rallies even as larger firms such as Parsvanath continued to slide, falling 8 per cent during the year.
The BSE FMCG index figured among the top five gainers for the second year in a row, and recorded a 48 per cent rally in the BSE FMCG Index came on the back of a 12 per cent and 19 per cent year-on-year growth in revenues and profits for the trailing twelve-month period. Nestle and Hindustan Lever Ltd were up 16 per cent and 29 per cent, respectively, during the course of the year.