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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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November 2009

The Dubai crisis nearly brought back the fear of credit crisis. However, while concerns remain, it now seems like just a blip in the market. Emerging markets performed strongly in November and the Indian markets smartly outperformed the other emerging markets. Materials, healthcare, consumer discretionary (led by autos) outperformed while telecom, real estate, consumer staples, and utilities underperformed. Midcaps continued their outperformance in the month and for the year.

GDP growth

The more than doubling of the markets since their March lows seems to be getting a validation from strong growth in the Indian economy. Despite a poor monsoon, strong performance across almost all segments, particularly services, resulted in a 7.9% GDP growth in 2Q FY10 (July – Sep 09) (Source: Bloomberg). This was well ahead of the consensus of 6.3%. Strength in services, at 9.3% growth, was led by government expenditure on wage arrears and an upturn in trade, transport and communications. A stronger than expected economic growth has led to the GDP forecast for this year being revised closer to 6.5% and for next year between 7.5% - 8.0% with HSBC estimates at the upper end at 8.5%.

Trends in GDP (%YoY)

After a strong Q2, some data points, particularly automobile sales data for two wheelers, passenger cars, utility vehicles tractors and commercial vehicles, suggest strong growth continuing. For the month of November, all auto manufacturers reported strong numbers. Last year’s low base coupled with lower interest rates and easier availability of vehicle financing is driving Y-o-Y growth in industry volumes.

*YTD is Apr – Nov (Source – Respective company reports)

Buoyed by the strong performance month on month, the sector is seeing continuous earnings upgrades.

A stronger than expected GDP growth has also raised possibilities of an earlier than expected tightening of monetary policy by the central bank, the Reserve Bank of India. As outlined earlier, despite the growth, credit is yet to pick up and we expect the RBI to move in a much calibrated way lest spoil the growth in a still fragile global recovery as highlighted by the Dubai crisis. However, with inflation also rearing up its ugly head, we expect some kind of action by the central bank sooner than later.

Headline inflation rate, March fiscal year-ends, 2008-2010E (%)

Note: The inflation data for FY2009E is actual data till March 14, 2009 and Kotak Institutional Equities estimates thereafter. Source: Government of India, Kotak Institutional Equities estimates

RBI's repo, reverse repo rates, cash reserve ratio and SLR (%)

Source: Reserve Bank of India & Kotak Institutional Equities

Institutional Flows

Flows towards Indian equity markets remained strong with foreign institutions buying $1.2 bn worth of Indian equities. YTD net buying aggregates $15.3 bn, the second highest ever. However, domestic institutions were sellers and YTD net selling from domestic institutions is at $829 mn. However, we expect domestic institutions led by insurance companies to turn buyers in the coming month. Insurance companies typically see lopsided flows in Jan-March period and these will get invested in the coming months.

Foreign Trade – Recovery in the offing

After 13 months of decline, India’s export growth is expected to turn positive next month. Imports, too, might turn around. A strong rebound in foreign trade, however, seems far off. Meanwhile, India’s trade deficit is likely to shrink substantially in FY10. Exports contracted 6.6% yoy in Oct ’09 – the smallest decline since Jan ’09 – while imports declined 15% yoy. Oct ’09 was the 13th straight month in which exports registered a decline. For FY10 YTD (Apr-Oct), exports and imports contracted 26% and 29.6%, respectively.

The trade deficit has started moving up after shrinking to a mere US$2.2bn in Feb ’09. A sharp correction in global commodity prices along with feeble global demand played a major role in reducing the trade deficit earlier. As global commodity prices have started moving up, the trade deficit is likely to increase, though gradually. We, however, expect India’s FY10 trade deficit to be much lower than the FY09 level.

As most developed countries emerged from the recession in the Sep ’09 quarter, global demand is likely to improve, albeit at a slow pace. This coupled with a rebound in global commodity prices could improve the outlook for India’s exports. The sharp fall followed by the strong run-up in international crude oil prices are pushing up oil imports ahead of non-oil imports. India’s robust GDP growth in 2QFY10 - 7.9% (Source: Bloomberg) bodes well for a likely spurt in non-oil imports as well.

Export growth likely to turn positive in Nov 09 

Source: Government of India, Anand Rathi Research

Outlook

With less than a month to go, it looks like 2009 will go down as the best year for Indian equities since 1991. A combination of strong economic recovery translating into earnings recovery and liquidity has led to this return of 83.48% YTD in USD terms (as of 30th November 09). While global liquidity into Indian equities remains strong and we expect strong support from the domestic insurance companies, markets at 17X one year forward is fairly valued. We expect markets to consolidate in the near term. However, earnings upgrades are continuing, thus providing comfort. We believe that after the lack lustre performance by the infrastructure space in recent months, infrastructure growth seems to be at an inflexion point. Just fresh from an infrastructure conference, policy makers and industry players are gearing up for rapid growth in the infrastructure sector led by an initial surge in activity in the road sector.

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