Mumbai: The winter chill seems to have rubbed off on market sentiment at the end of an unexpectedly bad year for Indian equities. The mood on the Street is bearish and markets may not see any significant rally in the first few months of 2012, analysts said.
Just like in 2011, macro-economic news flow will continue to set the direction for the market next year. The consensus among analysts is that markets might head downwards in the first half of 2012 before recovering in the second half, although few expect the Sensex to scale new highs.
“We remain bearish on the overall market, with downside risks to both multiples as well as earnings,” wrote Ashish Gupta, head of equity research at the Indian arm of Credit Suisse AG. Gupta said India’s slowing gross domestic product (GDP) growth will drive earnings downgrades as companies face weakening demand.
The consensus earnings estimate for Sensex firms for fiscal 2013, which has fallen 7 percentage points to 16%, is likely to be lowered further, Gupta wrote.
He also cited a rising fiscal deficit and an expected depreciation of the rupee as the other key factors that will likely weaken the appeal of Indian equities.
The 30-share Sensex, the benchmark index of the Bombay Stock Exchange, fell 36.6% in dollar terms this year owing to weakening fundamentals.
The stock market recorded its first annual fall in three years with the Bombay Stock Exchange benchmark, the Sensex, closing the year at 15,454.92 points, down 0.57% for the day and 24.6% in 2011.
India’s GDP growth fell to a two-year low of 6.9% in the September quarter, profits of BSE-500 firms declined to a five-year low of 39% over the same period, corporate investments dried up owing to policy delays, inflation remained persistently high at 9%, India’s twin deficits—fiscal and current account—widened, and the rupee depreciated 15.8%, spooking investors.
After pumping in a record $29 billion in Indian equities, net of sales, in 2010, foreign investors shied away this year, pulling out $380 million from the Indian market.
A further deceleration in India’s GDP growth over the next quarter, continued downgrades in earnings estimates for corporations and slowing global growth are likely to weigh heavily on market sentiment at least in the first three months of the next year.
Many economists expect GDP growth to fall below 7% in the current fiscal year, although the Union finance ministry has projected a 7.5% target.
Growth in Europe is also likely to falter in the first quarter, raising risk aversion globally, said Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd. “Markets could bottom in the first 90 days of the new year before recovering,” he said.
Although economic fundamentals are unlikely to turn around quickly, a slowing economy and an expected moderation in inflation owing to a base effect may prompt an easing of monetary policy, and act as a trigger for a market rally in the middle of the year, analysts said.
Indian equities may also start playing catch up after under-performing most major markets this year. India was the worst performer among the top 10 markets by market capitalization.
Globally, risk appetite will depend to a large extent on how European leaders take steps to resolve the euro zone sovereign debt problems. The strength of the US recovery and the extent of a slowdown in China are likely to be the other key factors that will determine market movements, analysts said. Volatility in prices of commodities, especially that of crude oil, will also affect the outlook for Indian stocks, they said.
While the state of the global economy will continue to influence Indian markets, the market direction is likely to be determined by India’s own economic fundamentals, analysts said.
“The key challenge for India will be to get its own house in order. We need to get fiscal deficit in control, bring down inflation and improve the climate for investments, and then foreign inflows will start flowing once again,” said Tirthankar Patnaik, strategist at Religare Capital Markets Ltd. “Even if the global environment is unfavourable, India’s structural growth story will remain intact as long as these fundamentals are in order and attract long-term investors from abroad.”
The key to market performance next year will be inflation, wrote Prabhat Awasthi, head of research at Nomura Financial Advisory and Securities (India) Pvt. Ltd in a 23 December outlook report.