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What are the Factors Affecting Indian Market ?

December 10, 2011

Over the past few months or almost a year now, the investment climate in India is certainly not in favor of Equities. Here is complete analysis on the top 5 issues affecting Investors caught in tight position from committing more funds to our Economy.

Scam Ridden GovernmentThe damage has been done, but recent flip-flop on FDI in pension funds, Insurance, Retail and power tariff revisions suggest that the bad news is coming to an end but the Politics of India’s Largest State Uttar Pradesh is making the Prime Minister nervous to take any firm decision.

Fiscal deficit The fiscal deficit is putting pressure on long bond yields, which in turn adversely affects equity multiples. A global crisis could cause the fiscal deficit to rise. This could imply that yields may stay higher for longer with negative implications for equities.

Inflation RBI has contracted its balance sheet and, given the decline in seasonally adjusted inflation, we believe the RBI is set to change policy direction via the liquidity injection, CRR cuts and rate cuts path over the coming months. Any excessive monetary easing in Europe or the US to push their economies may actually push the Commodity Prices Higher thus putting pressure on Inflation again. Unrest in the Middle East has the potential to create pain via higher oil prices.

Current Account Deficit ? Poses a challenge to maintain balance EXIM Trade as data suggests that from 2008/09 while Indian earnings outperformed the world, its equity markets significantly underperformed for this very reason.

What is Driving the Current Account Deficit in 2011?
Indians’ love and demand for Gold is driving up the current account deficit. Add the Gold ETF which is now enabling Micro Savings in Gold as another factor.

Corporate EarningsIndia’s relative ROE to emerging markets is at all-time lows, and money aggregates are pointing to a collapse in revenue growth in the coming quarters. Analysts expect mere 12-15% growth in earnings for broader market in FY 12. Complete Earnings & Valuations Coverage will follow in the next article.

Valuations The market is pricing in mid-single digit nominal industrial growth. The market’s absolute valuations are at attractive levels [Remember Bottom-Up Picking] Also remember that a bear-case outcome for growth will take valuations to previous lows. . The fact is that valuations are still above long-term trough levels but below the Base Case levels of forward P/E of 15.

Foreign Investors have Not Sold Enough Year To Date Compared to 2008-09, FIIs have not sold as much as they did then so if that were to happen will we break the previous lows ? Well the sentiment indicator is at levels consistent with a very bearish market positioning and from where the market has provided strong returns with a 12-18 month view. Long Only Investors are Holding on.

It is really tough time for Indian Investors. We will see in the next series of articles on what investment strategy should we adopt for maximizing returns.

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