The confidence is slowly coming back. The 15 per cent Sensex rally in the first two months of 2012 seems to have stoked the embers back to life when hope was dying at the end of 2011 after a year of slide in stock indices.
In 2011, the Bombay Stock Exchange (BSE) Sensex fell 25 per cent, or 5,054 points, to 15,454. In 2012, it rose 19.2 per cent, or 2,974 points, to 18,428 from the beginning of the year till 21 February. However, it slid 5.3 per cent in the last seven trading sessions of February and was at 17,584 on 1 March 2012.
How good are predictions of a rally that some say can take the market to highs they have never seen before?
There will be many difficulties and ifs and buts on the way, for instance rising crude oil prices, but it seems that the dark clouds of uncertainties are dispersing. At the present juncture, there appears to be a more than even chance that equities will look up once again in 2012.
Attractive stock valuations, moderating interest rates, falling inflation and rising demand from the rural sector could all add up to give a fresh fillip to the market.
The Sensex can touch 22,500-23,000 by the end of December 2012.
Head, Institutional Clients Group, Asit C Mehta
Going forward, experts are positive on real estate, banking, information technology (IT) and fast moving consumer goods (FMCG) sectors. In 2011, only the FMCG sector ended on a positive note.
Nitin Jain, head, capital markets, (individual clients), Edelweiss Financial Services, says, "We believe this year could see a strong liquidity-driven rally with minor corrections. With so much liquidity, equity as an asset class could perform well. The only threat is rising crude oil prices, which we believe will come down in the next few months."
Why did India's benchmark stock index surge 20 per cent in just 36 trading sessions from the start of the year? Perhaps it was a result of the sharp slide last year which made the market attractive at a price-to-earning (P/E) multiple of 16, much lower than the average for the last three years, which is 18.33.
In December 2011, the European Central Bank (ECB) injected huge liquidity into the system by providing three-year funding to banks, called the Longer Term Refinancing Operation (LTRO).
Hemant Kanawala, head of equities, Kotak Mahindra Old Mutual Life Insurance, says, "ECB funding led to a rally in risky assets globally. This, in turn, helped Indian equity markets get foreign institutional investor, or FII, inflows of more than $5 billion during the first two months of 2012."
It is not only the fundamental factors that are driving the market. Most technical indicators such as moving averages, too, indicate a smooth drive ahead.
Pankaj Pandey, head of research, ICICI Securities, says, "On 12 March 2012, the National Stock Exchange Nifty's 50-day moving average, at 5,177, rose higher than the 200-day moving average, 5,163, making a 'Golden Cross'. There have been three instances in the past 10 years when the Nifty has generated a Golden Cross and given positive returns for the next six-12 months."
A Golden Cross is made when a medium-term moving average (50 days) crosses a longer-term moving average (200 days). As long-term indicators carry more weight, the Golden Crossover represents a big shift in momentum from bears to bulls and indicates a bull market on the horizon. The long-term moving average (200 DMA) becomes the new support level in the rising market.MAIN DRIVERS
Let us look at the major macro-economic factors
which can give direction to the stock market in 2012.FIIs:
Since the beginning of 2012, FIIs had made a net investment of Rs 35,570 crore in Indian stocks till 29 February. In the first two months of 2011, they had withdrawn a net Rs 9,398 crore. In 2011, the net outflow by FIIs was Rs 2,714 crore.
FIIs have the financial muscle
The Sensex can reach a new high this year. It can end the year above 21,500.
Chief Operating Officer, Way2Wealth Brokers
to give direction to India's stock markets and hold the key to the fortunes of the market. For instance, in 2007, they pumped in $16 billion, or Rs 71,486 crore, and the market rose 44 per cent during the year.
In 2008, they took out $12 billion, or Rs 52,376 crore, and the market fell 45 per cent. In 2009, the Sensex rose 81 per cent as FIIs put in $17 billion, or Rs 83,424 crore. In 2010, the rise was 17 per cent as they invested $29 billion, or Rs 1,33,267 crore.
According to market experts, in early 2012, India emerged as one of the most sought-after emerging markets as FIIs looked for opportunities in undervalued and beaten-down stocks.
Aviral Gupta, fund manager, equity, Indiabulls Mutual Fund, says, "FIIs turned towards India mainly because forward valuations were much below the mean, not only of domestic equities but also emerging market equities. FII inflows will continue as global capital markets have huge liquidity. We just need an inflow of $20 billion, or Rs 1 lakh crore, to get an upside of around 70 per cent, as it happened in 2009."
Markets have bottomed out. The Sensex can touch 20,000 levels in 2012.
Chief Executive Officer, Religare Securities
We saw policy action by the government in view of assembly elections in some major states. Food inflation started moderating and the Reserve Bank of India, or RBI
, cut the cash reserve ratio, or CRR, by 50 basis points, or bps, in January.
This was followed by a 75 bps cut on 9 March 2012 to ease liquidity. The reduction from 5.5 per cent to 4.75 per cent is expected to inject Rs 48,000 crore into the system.
CRR is the proportion of deposits banks must keep with the central bank. A bps is 0.01 per cent or one one-hundredth of a per cent.
Meanwhile, headline inflation fell to a 26-month low of 6.55 per cent in January 2012 from 7.47 per cent in December 2011.
However, in February 2012, the inflation figure inched up to 6.95 per cent. On 16 March 2012, Finance Minister Pranab Mukherjee said in his Union Budget 2012-13 speech that he expected inflation to come down in the next financial year. "I expect the headline inflation to moderate further in the next few months and remain stable thereafter," he said.
Krithika Subramanian, associate economist, CARE Ratings, says, "Balancing the inflation-growth tradeoff will be crucial. A reversal in interest rates is expected this year, although the timing remains uncertain."
High Inflation May Hit Equity Returns
One of the implications of the liquidity cycle generated by the US and the European Central Bank (ECB) is that the commodity price risk will increase. Oil prices are at the extreme end with Brent crude reaching $125 per barrel at the end of last week amid the west's tensions with Iran.
Indian wholesale price index (WPI) inflation will also be higher and may again reach 9-10 per cent by the end of 2012.
Even if crude oil prices were to remain stable, India will see a resumption of high inflation as the government tries to minimise the hidden components of inflation (subsidies).
Inflation may accelerate this year after a brief hiatus till March. This will remain a bigger worrying factor for the markets compared to slower GDP growth.
Rising commodity prices may also mean that explicit changes in the Indian monetary policy stance may not occur until late 2012. Even in the short run, however, the RBI may be wary of easing monetary policy to support weakening growth in an environment of rapidly rising oil prices.
Stocks have always been the best hedge against inflation in the long run. The underlying corporations have real assets, employ real people, make real things and provide real services. Productive resources like oil, copper, forestry and farmland or farm produce will also be as good, or probably much better, than broad stocks in the short run.
In the short term, rising inflation can hurt stocks badly. Investors hate jumps in inflation because they sharply raise the levels of uncertainty about consumption, savings and investments. The short-term negative correlation between stocks and inflation in the past has been quite high. This time also, things won't be very different.
VP and Fund Manager, Motilal Oswal AMC
Due to economic sanctions on Iran
, a big oil producer, the price of Brent crude oil rose 22 per cent to $124 between 20 December 2011 and 2 March 2012.
Market experts say this will lower the global supply by 6-10 lakh barrels per day, a gap which other oil producing nations will find it difficult to fill. This, in turn, is expected to keep oil prices high.
Rakesh Goel, head, marketing and distribution, Bonanza Portfolio, says, "The fact is that oil prices have become sensitive to shocks on the supply side. However, there are reasons to believe that the Organisation of the Petroleum Exporting Countries (OPEC) will take steps to increase supply by using spare capacity and neutralise any price shock."
High crude oil prices affect the market by increasing costs of almost all industries, except the information technology sector. This lowers demand and impacts profitability.
Gagan Randev, chief executive officer, Religare Securities, says, "Rising crude oil prices could be a dampener as they can derail our country's finances. We, however, do not see the Sensex sliding back to the 2011 lows unless there is a global catastrophe."
Rising crude oil prices can impact automobile, manufacturing and heavy industries sectors. "The market has already witnessed a huge correction in 2011. Therefore, 2012 will be a year of better growth and performance despite shocks on the oil front," says Geol. On 19 March 2012, the Brent crude oil was trading at $125.92 per barrel.
Rupee Vs Dollar:
Rising Crude Oil Prices a Big Risk
Stock markets had been bullish during the first two months of 2012 driven largely by the easy liquidity provided by the European Central Bank (ECB). However, they started correcting towards the end of February due to factors including the risks associated with the rise in oil prices.
Crude oil prices are heading northwards following the economic sanctions imposed by the US and Europe on Iran for allegedly going ahead with its nuclear weapons programme.
Since Iran is the world's fifth-largest oil exporter within OPEC, the sanctions are impacting global crude oil prices. Brent crude rose from around $110 per barrel in January to more than $124 per barrel by February-end. The prices are expected to stay in the range of $120-126 per barrel.
This has serious implications for India as Iran is its second-biggest supplier after Saudi Arabia and accounts for 12 per cent of India's crude oil imports. High oil prices remain one of the biggest risks to the Indian economy as they negatively impact macroeconomic indicators, earnings of India Inc and investor sentiment. Increase in crude oil prices negatively impacts trade deficit, fiscal deficit and inflation. A one-dollar increase in crude oil price increases the fiscal deficit by Rs 1,500 crore. As a result of increasing oil prices and the resultant mounting fiscal deficit, the government will be inclined to increase prices of petroleum products following the state elections. This could have an impact on inflation as well as monetary policy and corporate earnings.
Also, the oil price rise has a negative impact on oil marketing companies as they are already facing huge losses on the subsidised sale on petroleum products.
For now, the markets should continue to move sideways with a negative bias unless some positive news comes.
Founder and CEO, Unicon Investment Solutions
According to the RBI's data, the rupee fell 10 per cent between 15 December 2011 and 29 February 2012. Market experts say the currency can play a big role
in giving direction to India's stock markets.
Milan Bavishi, head of research, Inventure Growth and Securities, says, "The year could belong to equity if the dollar remains below the 51-52 level, that is, it (dollar) either consolidates at the current level or falls." On 16 March 2012, the rupee was at 50.31 to a dollar.
"There is a positive correlation between FII inflows and rupee appreciation. Higher FII inflows can strengthen the rupee," says Sujan Hajra, chief economist, Anand Rathi Financial.SECTORAL ANALYSIS
Market experts are positive on real estate, banking and capital goods sectors. However, they favour a bottoms-up approach for selecting stocks.
"Year after year it is becoming more and more clear that the budget is just a one-day event for equity markets."GAURANG SHAH
Asst. VP, Geojit BNP Paribas Financial Services
Rajnish Kumar, executive vice president, Fullerton Securities, says, "For this calendar year, we are positive on automobile, banking and capital goods sectors. Given the surge since the start of the year, a shift from a sector-specific approach to a bottoms-up stock-specific approach will lead to a good performance."
Gupta of Indiabulls Mutual Fund seconds Kumar. "We are confident on banking, IT, realty and FMCG sectors."Real estate:
Due to rising interest rates and regulatory issues faced by the sector, the BSE Realty index fell 51 per cent in 2011 from 2,856 on 31 December 2010 to 1,376 on 31 December 2011, becoming the worst performer of the year. However, since the beginning of the year till 2 March 2012, it outperformed others by rising 35 per cent, or 476 points, to 1,846.
Sandeep Nayak, CEO, Centrum Broking, says, "Real estate and capital goods stocks were beaten down last year due to tightening monetary policy. They have started recovering on expectations of the rate cycle turning. Companies with good governance standards and debt reduction strategies will do well. DLF seems to be on that path."Banking:
Like real estate companies, banks, especially the big ones, failed to perform well in 2011, when the BSE Bankex fell over 31 per cent. It was at 9,153 on 30 December 2011. However, from the beginning of 2012, the index had risen 30.71 per cent till 2 March 2012.
"By the year-end, the market may rally by 8-12%. How ever, in the near term, it is likely to stay volatile."AMAR AMBANI
Head of Research, IIFL
Market experts say if interest rates fall, the sector can give good returns in 2012.
Samir Gilani, head of derivatives and co-head, equities, MAPE Securities, says, "Interest rate cuts will limit the downside from the ongoing NPA (non-performing assets) cycle. This, coupled with growth in credit and fee income, will warrant expansion of multiples in 2012-13 and 2013-14. Stocks like Yes Bank, State Bank of India and ICICI Bank can give handsome returns."Capital Goods:
The BSE Capital Goods index was the second worst performer in 2011 after the BSE Realty index. It fell 48 per cent to 8,067 points.
Gopal Agrawal, chief investment officer and head, equity, Mirae Asset Global Investments, says, "The hope of a decline in interest rates and healthy government spending on infrastructure in 2012 can give a positive direction to the sector."
During the 12th five-year plan (2012-17) the government expects investment in infrastructure to be around Rs 50 lakh crore, half of which expected to come from the private sector.
Gilani of MAPE Securities says, "The investment cycle has come to a standstill. However, there are indications that the capex cycle has troughed and a new capex cycle will begin in 2012-13 and 2013-14. Valuations of most companies in capital goods and power sectors such as Bhel, IVRCL and NTPC are attractive. We expect above-average returns from the large-cap stocks in the sector."Information Technology:
During the previous calendar year, the BSE IT index fell around 16 per cent, or 1,073 points, to 5,752 levels. However, since the beginning of 2012, the index has jumped 4.44 per cent to 6,081. Due to improvement in the US economy, market experts are positive on the future of the sector.
"Interest rate sensitive sectors such as real estate and banking can give lucrative returns during the ongoing calendar year."VIVEK MAHAJAN
Head of Research, Aditya Birla Money
Amar Ambani, head of research, IIFL, says, "Within global cyclicals, we prefer the IT sector as health of the US economy is improving and several large deals are coming up for renewal."
Lalit Thakkar, managing director institution, Angel Broking, is positive on MindTree and Mahindra Satyam. "The stock price of MindTree and Mahindra Satyam can touch Rs 519 and Rs 87, respectively, in the next few quarters." On 16 March 2012, MindTree and Mahindra Satyam were trading at Rs 456 and Rs 69.55, respectively.FMCG:
In 2011, the FMCG index outperformed others by rising 9.5 per cent to 4,035. Experts are positive on the sector for 2012 too.
"The FMCG sector is the most defensive play in the current scenario as consumption demand continues to be strong despite the high interest rates. The sector is expected to do well in the near future. Demand from rural India will play a vital role in the rise of FMCG stocks. Stocks such as ITC, Dabur India and Godrej Consumer Products are likely to give lucrative returns in 2012," says Randev of Religare Securities.INVESTMENT OPTIONS
For investors who adopt a stock-specific approach, we spoke to market experts for a few investment options for 2012. They zeroed in on the likes of Bharti Airtel, Cairn India, VST Industries, Wipro and ICICI Bank.
Deven Choksey, managing director, KR Choksey Securities, says, "Investment in stocks such as Adani Enterprises, Dhanalakshmi Bank, Cummins India and Praj Industries can be a good option for one's portfolio at this point of time."
"We are positive on interest rate-sensitive sectors like banking, real estate, automobile and infrastructure."VINEET HETAMASARIA
Head of Research, PINC Research
However, Prakash Diwan, head, institutional clients group, Asit C Mehta, says, "Till December 2012, investors can bet on stocks such as Exide Industries, Glenmark Pharmaceuticals, Indoco Remedies and Godrej Consumer Products and can expect 20 per cent-25 per cent return in the next few quarters."TAKING SHINE OFF GOLD
A shift from gold, the safe haven, to equity or other asset classes can put some pressure on the yellow metal in the coming months. Gold can fall 10-15 per cent till December, say experts.
Gold rose 29 per cent in 2011. On the Multi Commodity Exchange, it jumped Rs 6,026 per 10 gram in 2011 to Rs 26,601 per 10 gram on 30 December 2011. On 1 March 2012, it was at Rs 27,653 per ten gram.
Ambareesh Baliga, chief operating officer, Way2Wealth Brokers, says gold will decline a further 10-12 per cent by the end of this year. Prakash Diwan of Asit C Mehta agrees. "Gold can decline 10-15 per cent till December 2012," he says.
Ajay Jaiswal, president, investment strategies, head of research, Microsec Capital, says, "In 2012, gold is unlikely to generate returns it has given in the past as demand is likely to wane because of the high price. Also, any escalation in the US-Iran conflict may lead to strengthening of the dollar, which may impact the yellow metal. In the international market, gold may trade between $1,540 per ounce and $1,800 per ounce in 2012."
Pandey of ICICI Securities says, "The fortune of equities is tied to the relative attractiveness of fixed income, gold and real estate. Any deterioration in the risk-return tradeoff in these asset classes will be a blessing for equities. Else, equity markets may continue to be sidelined."WHAT'S IN IT FOR INVESTORS?
If we look at the historical figures, we see that this is not the first time the market has risen over 15 per cent in a very short period.
In 2008, the Sensex fell around 52 per cent. Despite a lacklustre year, the market gave buying opportunity to investors on two occasions. Those who boarded the train on time gained handsomely.
"If the Nifty manages to close around 6,060, it would give a 31% return in 2012. It may register an EPS of Rs 404 in 2012-13."
President-Research & Investment Strategies, Microsec Capital
In 2008, from 18 March 2008 to 5 May 2008, the index jumped 18 per cent, from 14,833 on 18 March to 17,490.90 levels on 5 May. However, due to fear of global financial crisis in 2008, it fell over 14 per cent to 14,961 between 5 May and 5 August. Likewise, between 16 July and 11 August, it surged 23 per cent to 15,503 on 11 August and corrected over 45 per cent between 11 August and 27 October.
However, this time it seems the rally is likely to continue for the long term. Data from ICICI Securities show that prior to 12 March 2012, in the past 10 years, the Nifty had made a Golden Cross on 26 May 2009 (4,116 levels), 26 October 2,004 (1,780 levels) and 7 July 2003 (1,140 levels).
Our calculation shows that after these events, the index surged 20 per cent, 35 per cent and 37 per cent, respectively, over the next 12 months.
Market experts say you can be a part of such sharp rallies if you study in detail the fundamentals as well as technical aspects of the market in the bear phase.
Thakkar of Angel Broking, says, "Fundamentally, attractive valuations sometimes signal a sharp upside on the anvil. However, technically, a sharp rise or fall in the markets can be expected to take place when the market shows divergence on momentum indicators. These indicators can be Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD)." RSI measures the relative internal strength of a price pattern. Traditionally, a reading of 30 or less indicates an oversold condition, while a reading of 70 or more shows an overbought condition.
MACD is a price momentum oscillator based on the difference between two exponential moving averages (EMA) of a security's closing price, a 26-period EMA and a faster 12-period EMA. The difference between these two lines (differential) is itself smoothened by an even faster nine-period EMA, which is called the signal line. If the signal line crosses above/below the differential, the interpretation is that the price pattern is entering a new phase of acceleration/deceleration.
However, Pankaj Pandey of ICICI Securities says there are no exact indicators that indicate a sudden spurt. But, there are a few thumb rules which give one a sense that the markets may have hit the bottom.
"The indicators include trailing 12-month (TTM) P/E multiples which show that whenever the markets fall below 18 on TTM P/E, subsequent returns from investment in equities are quite robust over two-three years," he says.
While equity may resume its upward movement, it is best to invest regularly in quality stocks over the long term. In such uncertain times as these, it is good to remain cautious.
"We strongly advise clients to stay invested. Do not get carried away with market volatility. Falls in the market should be used to buy good quality stocks. High quality management and strong business models with good visibility and strong cash flows should be looked at for investing," says Nitin Jain of Edelweiss Financial Services.
Fundamentals of Market Unchanged
The key benchmark indices, Sensex & Nifty, have run-up nearly 16 per cent and 15 per cent respectively since the beginning of 2012 with FIIs, investing more than $7 billion during the period.
The rally was largely broad-based on account of participation from overseas country ETF's. Overseas country ETF's invest primarily as per the geography; and their allocation tends to mirror the respective benchmark. This consequently brought in a sizeable demand stimulus to all the index constituent stocks, expanding the rally across the counters.
The primary reason for the surge in FII inflows was on account of decline in the risk-premium in the developed world, especially in the EU and the liquidity infused by the European Central Bank.
The fundamentals of the domestic equity market remain largely unchanged, notwithstanding the liquidity variations. The continued high cost of borrowing and liquidity premium in the domestic market remains a major growth impediment for the corporate sector. The increasingly slow movement in the policy reforms too has been an area of concern.
From the debt market point of view, the acute liquidity paucity remains a cause for concern. The 75 bps reduction in CRR by RBI, while a positive surprise for the market, still remains inadequate in addressing the huge liquidity gap. At that, the near conclusion of the OMO programme in the current fiscal; and the anticipation of the fresh supply; have already begun to harden the long-term yields.
To add to that, the continued buoyancy in the Brent crude price may necessitate a price pass-through to the end-users. This may provoke a renewed inflationary pressure on the economy. From that stand point, the anticipated repo-rate reduction by RBI may turn-out to be more of a gradual and studied process than earlier thought.
In the closing, the market has been eagerly anticipating policy recourse to fiscal discipline by a two-tiered application of frugal expenditure and ingenious resource generation. Divestment of select PSUs in an improved equity market; inflows from the possible spectrum re-allocation; and, a more targeted subsidy regime, may provide the necessary revenue fillip in the next fiscal.
The resultant decline in fiscal deficit may lead to relatively moderate borrowing programme by the government, which would also allow for competitive resource re-allocation to the commercial sector. This, in the long run, may prove to be an effective growth stimulus for the economy.SANDESH KIRKIRE
CEO, Kotak Mutual Fund
(This is a sponsored article)
*An earlier version of this story erroneously mentioned the figure 21,0005 in the headline. It should have been 21,005. The correction has now been made.