BackDecember gains bring some relief to weak markets
BSE market cap crosses Rs100 trillion; investors hope for return of FIIs, pickup in earnings growth next year
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The market value of companies listed on BSE Ltd moved back above the ₹ 100 trillion mark on Tuesday, as a December rebound helped pare losses in the worst year in four for Indian equities.
Since 9 December, BSE’s benchmark 30-share Sensex and the National Stock Exchange Ltd’s Nifty have both increased by more than 4%.
Broader markets have gained as well and the BSE’s market capitalization has rebounded by ₹ 4.75 trillion.
On Tuesday, the BSE’s market cap closed at ₹ 100.01 trillion, its highest since 23 October. The Sensex closed at 26,079.48 for the day, up 45 points, or 0.17%, while the Nifty closed marginally higher at 7,928.
With two trading days left, the Sensex and Nifty have shed 5.2% and 4.3% respectively in 2015, their worst performances since 2011. They still outperformed the MSCI’s EM index, which has shed 16.31%.
“The year 2015 stands in sharp contrast to 2012. The former was a good year for macro, as measured by the four key parameters of GDP (gross domestic product) growth, inflation, current account balance and fiscal balance. But this did not translate into spectacular returns for the stock markets. In comparison, almost nothing went right on the macro front in 2012, but it marked a great year, with the markets (BSE 100) returning 30%," Morgan Stanley commented in a report on Tuesday.
Investor disappointment over corporate earnings that are yet to rebound, a drop in foreign investment inflows as the US tightens interest rates and a rout in commodity prices contributed to the stock market losses.
Market participants hope 2016 will be a better year; key to that will be the return of foreign investors and a pickup in corporate earnings growth.
Foreign institutional investors (FIIs) were sellers of Indian equities in six of 12 months this year. FIIs bought a net of $3.01 billion in Indian equities, the lowest since 2011. In contrast, domestic institutional investors stepped up their investments as retail inflows returned to equity mutual funds. But this wasn’t enough to balance the downside pressure on the markets.
“The year that went by was a bad year, mainly as earnings growth did not meet expectations. Over the last one year, we saw various earnings cuts. There has been a 20% cut in earnings estimates (Nifty) for FY16," said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.
Prasad said earnings estimates were cut due to factors including the collapse of commodity prices.
He points out that around 20% of Sensex/Nifty company earnings come from commodity companies, even if Coal India Ltd, which mainly caters to the domestic market, is excluded.
The BSE metal index has been the worst sectoral performer in 2015, with a 31.94% decline so far. The BSE realty and basic materials indices have shed 14.7% and 14.17%, respectively.
Four of the top five eroders of wealth on the Sensex were commodity-linked companies. Vedanta Ltd has lost more than 50% of its value.
Hindalco Industries Ltd, Tata Steel Ltd and Oil and Natural Gas Corp. Ltd shed between 45.7% and 27.4%.
Brent crude prices are down 35.88% for the year. Copper on the London Metal Exchange has shed 26.34% in 2015, while aluminum eroded 16.05%.
“The key issue this year was the continuous weakness in the EM (emerging markets) space on the back of very weak commodity prices. The underlying theme of 2015 was basically the rout in commodities owing to the weak demand and anticipation of stronger dollar," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd. According to Sanghavi, roughly $75-80 billion went out of emerging markets this year. Of this, about 9-10% would be from the Indian markets.
“Earnings on the domestic front also haven’t picked up. The commodity-based companies mainly have seen a drastic drop in earnings. There is also a lack of high incremental demand in domestic economy," said Sanghavi.
This month, the finance ministry scaled down its growth projection for the economy to a range of 7-7.5% in the current fiscal year from 8.1-8.5% forecast in February.
The government’s mid-year economic review cited weak demand as the central challenge facing the Indian economy.
“Economic recovery did not turn out to be as strong as people were expecting, especially for the infrastructure part of the economy. Also, because of delayed economic recovery, and the fact that commodity cycle was weak, there were a lot of loss provisions in the banking sector," Prasad said.
To be sure, a pickup in urban demand helped some sectors.
The BSE consumer durables and BSE healthcare indices have been the best performers this year with a 24.25% and 15.68% increase, respectively.
Maruti Suzuki India Ltd and Lupin Ltd have been the top gainers, rising 40.2% and 29.7%, respectively.
Mid-caps and small-caps outshine
Mid- and small-cap companies outshone the benchmark indices for the second year in a row and are expected to continue their run in 2016 because of strong interest among retail investors and mutual funds.
Mid-cap and small-cap indices have gained 9.34% and 5.5% so far this year, after a 46.42% and 62.91% rise in 2014.
Among the three calendar years which delivered negative equity returns in the last decade, 2015 has been the only one in which, in a falling market, mid-cap stocks have outperformed large caps, said the Morgan Stanley report.
Conventional wisdom suggests that in years of negative returns, mid-caps under-perform large cap stocks owing to higher pressure on earnings and lower liquidity in the markets, said Morgan Stanley.
“Whenever domestic interest is high, mid-caps outperform," said Sanghavi of Ambit.
Domestic institutional investors have pumped ₹ 68,202.31 crore into Indian shares in 2015, the highest since 2008.
Will 2016 be better?
Some analysts expect 2016 to be better as an earnings recovery finally takes shape.
“We started with expectations of 20% growth in Nifty earnings for FY2017, Even if we assume some cuts in the sectors such as commodities, cement and industrials, I think we will still see around 15% earnings growth, which is not too bad," said Prasad of Kotak.
Sanghavi added that with the first Federal Reserve rate hike now out of the way, markets should look up in 2016.
The Federal Open Market Committee raised the range of its benchmark interest rate by a quarter of a percentage point to 0.25-0.5% on 16 December.
“The year 2016 will be a better year. Will it be a very big year, we don’t know yet," said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd.
Not everyone is convinced that the coming year will be better for the markets.
“At the risk of sounding like a broken record, we think India is on a path for gradual and uneven recovery and just because a calendar year has changed does not mean that reality will change," said the Morgan Stanley report quoted above.
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