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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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December 2009

The Indian markets ended 2009 on a good note with the Nifty gaining 3.38% (USD) in December. Midcaps continued to outperform and delivered a return of 4.01%.  IT, materials and Industrials sectors were relative out-performers, while Consumer Staples, Financials and Energy underperformed. Midcaps continued to outperform the large caps over the month. 

2009 has been the best year for Indian equities since 1991, with markets (Nifty) gaining 75.76% (83.87% in USD) (Source: Bloomberg), albeit coming from a low base on 2008. Midcaps, after a strong show in the second half of the year, delivered a return of 98.97% (108.16% in USD) for the year (Source: Bloomberg). While easy liquidity certainly played an important role in this spectacular rise, it was the return of growth and political stability which saw the Indian markets getting re-rated from almost the historical lows on PE multiples to around a 15% premium to its long term average.

1-year rolling forward P/E now trading at reasonable valuations
Source: BSE, RBI, Kotak Institutional Equities

Contrasting decade

The “lost” decade for the developed markets was well “the decade” for the Indian markets. While the developed markets particularly the US markets were hit first by the dot com bust, then by the terrible post 9/11 trauma, and then finally by the credit crisis, the Indian markets gained steadily on the back of strong economic growth. While being a domestic consumption led economy, India was relatively less affected by the global shocks, due to its economic reforms and improving demographics that continued to play their important role. The decade also firmly established India’s pole position in IT outsourcing and emergence as a strong generic pharmaceuticals player. We expect these factors to continue their positive impact on the economy and thus believe that the outperformance of the Indian markets is likely to continue in the coming years, although not without volatility.

FII flows

With FII (Foreign Institutional Investor) flows of over USD17bn, overseas investment flows into India were close to the best ever. December 2009, contrary to expectations of profit booking, saw large buying by FII’s. We expect FII flows to continue to flow towards emerging markets and Indian markets would get its fair share. As highlighted earlier, we believe that in the next few months, domestic insurance companies is likely to see large inflows and could well determine the near term trend in the market.

Corporate Earnings

The earnings upgrade cycle continues for corporate India. We see the street upgrading estimates on most sectors led by automobiles which continues to see robust growth. Auto sales continued to surprise on the upside. December, usually a lean month, saw auto sales jumping by 50% to 100% for most listed companies.

Partly a base effect, earnings growth for the current quarter and the next two quarters, we believe, is likely to remain strong.  Autos and commodities which were badly hit in the last downturn, in our view, are likely to see the strongest growth in earnings over the next 12 months.

Sensex: Low base would boost the YoY numbers

Source: IIFL Research. Note: Sensex aggregation is on full market cap basis

Inflation and monetary tightening worries

Led by food inflation at 19.7% yoy, inflation continues to raise its ugly head with the latest inflation figure at 4.78%. The inflation number will continue to move up and we may well see headline inflation hitting around 8% by April 2010. As pointed out earlier, the central bank is at crossroads. While we keep hearing about monetary tightening measures to rein in inflation, the central bank, in our view, is expected to be calibrated in its approach as it may be keen on credit growth picking up rather than spoiling economic growth. Credit growth seems to have bottomed out. The quarterly credit policy review meeting scheduled for January 29th will be keenly watched.  On the positive side, it is possible that the earlier monetary policy exits in emerging markets and thus higher yield differential, coupled with strong economic growth could attract inflows from developed markets seeing lower growth.

In the very near term, policy expectations are likely to drive the market. With the Union Budget being less than two months ahead, markets will be keenly watching policy announcements particularly on fiscal deficit consolidation and thus disinvestment target, oil and gas subsidy sharing mechanism, raising of FDI in insurance from 26% to 49%, removal of the stimulus package (through withdrawal of duty cuts), road map for Goods and Services Tax (GST) . The most important announcement from a market perspective would be the disinvestment target and schedule. While large scale disinvestment will suck away liquidity, it will usher in a new cycle of lower fiscal deficit which will help in keeping interest rates low and prevent crowding out of private sector credit. 

Despite a very strong 2009, we expect markets to gain moderate returns in 2010. In our view, 2010 is likely to be a year of consolidation, although not without volatility. GDP, led by domestic consumption and industrial growth, is expected to grow by 7.5-8.0% with an upward bias, in the year ending March 2011 (Source: Kotak estimates). Apart from the strength in the domestic economy, we believe that India will also benefit from the global recovery.

• Headwinds that the Indian economy and the Indian equity markets face are inflation, and thus monetary tightening, fiscal deficit, fresh equity issuances, valuations, dollar strength and oil prices if they move towards the three figure mark.
• Tailwinds would be revival in industrial growth, a strong rural sector growth, ongoing reforms, infrastructure spending, earnings growth and liquidity.

After a strong consumption growth, capacity build up is now inevitable. With the corporate balance sheet being deleveraged we see a fresh investment cycle. This should benefit the capital goods sector. Higher capacity utilisation also bodes well for margins. With a strong GDP growth coupled with earnings growth, we expect the market premium to sustain and the markets to largely track earnings growth during the year. With earnings estimates ranging from 20-30% in the year ending March 2011 (Source: Various Brokerage reports), even a tracking of earnings growth by the markets is likely to give decent returns. Despite a strong performance in the second half of 2009, on the back of return of growth and liquidity, we expect midcaps to continue to outperform.

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