The Vidya Balan starrer “The Dirty Picture” released at a
very appropriate time. Though the movie has been a hit, 2011 has indeed been a
Dirty Picture for Corporate India, stock markets and the rupee.
At the start of the year the Sensex was at 20000 levels.
There were fears around Greece and other European nations. The first half was
expected to be tough but the second half was thought of a recovery phase.
However the second half was even worse.
The Reserve Bank of India (RBI) continued to hike key policy
rates (from 6.25% in Dec 2010 to 8.50% currently) in a bid to curb inflation.
By doing so, it made the capital expensive, hitting industrial and overall
economic growth. However, RBI kept its key policy rates unchanged during its
December 2011 review.
The falling IIP along with rising cost of raw materials and
a perception of policy paralysis among stakeholders made 2011 a year that India
would like to put behind. The year witnessed BSE Sensex making new lows, gold
at historic highs and INR falling to record lows.
In addition to rate hikes following is the overview of the
top financial stories of the year.
IIP data into negative territory for the first time since
2009:
IIP nos kept falling through out the year, it nose-dived to
negative 5.1% in October 2011 on the back of falling consumer demand and
declining corporate investments.
INR at all-time low:
INR fell to a record low of 54.17 per USD breaching the 54
level first time in history on sustained foreign capital outflows and dollars
gains against the euro and other rivals overseas. It has fallen by 16% since
the beginning of the year, the worst performance among the Asian currency. A
weakening INR is also eating into the gains of falling international commodity
prices adding to inflationary pressure.
Sensex falls to 28 month low:
In a departure from big gains in the past two years, Sensex
witnessed 23% fall till 29th Dec 2011 as risk aversion deepened globally
coupled with absence of policy initiatives to revive slowing domestic growth.
FIIs the main drivers of the market, turned negative on Indian equities this
year after having injected a record USD 29.36 bn in 2010, pulled out USD 318 mn
in 2011.
Gold price touches record high:
Continuing their record-breaking spree, gold and silver
galloped to all time highs in 2011 (from USD 1400 levels in 2010 to USD 1900 levels
in September 2011) on strong demand in times of economic turmoil and rising
inflation. Nervous investors preferred to park their funds in gold as a safe
investment instead of risky assets like equities. Internationally gold prices
have seen correction from its all time highs. However, falling INR has
acted as a cushion for gold prices in India.
Downgrading of debt ratings:
Downgrading of debt ratings and the poor outlook of some
European countries in May deepened investors concern. Later, an unprecedented
downgrade of the US credit rating by S&P on 5th August led to turmoil in
global markets, triggering fears of another recession in the world's biggest
economy.
So what’s in store for 2012?
After making big moves over the past 18 months, RBI has
decided to maintain a status quo for the time being in its December 2011
Monetary policy review meet. RBI has maintained the cash reserve ratio (CRR) at
6%. The repo rate (rate at which banks borrow from the RBI) was also kept
unchanged at 8.5%. RBI however has clearly indicated that no further rate hikes
are warranted. RBI also indicated that rate cuts would happen after an
assessment of macroeconomic fundamentals.
The unresolved situation globally also hasn't helped matters
much. A weak economy globally puts pressure on emerging market economies due to
slowing export demand. In light of slower growth in these countries, central
banks in Brazil, Indonesia, Thailand, etc have all cut interest rates. Being
conservative as usual, the RBI has not followed its counterparts, opting
instead for a mere pause in rate hikes.
On the fiscal ground, India being net importer country, the
depreciation of the Indian Rupee (depreciated by around 18% since August 2011)
is also posing a serious risk.
With so much uncertainty looming overhead, it's hard to
predict what the next action step for the central bank will be. Inflation seems
to be on a downward trajectory, but credit growth is seeing a slowdown.
Downward pressure on the rupee is also making the situation difficult. If it
persists, fuel inflation will be a bigger worry than just food inflation. We
can cheer that RBI has conceded that slowing growth is a major concern, by
pausing rates for the interim. Thus we can breathe easy for now, even if it is
only for a short while. But, a formal assessment of inflation and growth
numbers is still due in January 2012. We sure hope the New Year has good
tidings for India Inc.
The worry that still persists is the health of Euro-zone
countries. It is perceived that Euro zone crisis may not stop with Greece and
Italy, since Fitch downgraded Portugal's rating to 'BB+' (from 'BBB-') a non
investment grade. Similarly, S&P downgraded Belgium to 'AA' (from 'AA+') it
is making investors believe that contagion effect is indeed spreading across
the Euro Zone that could prove a serious threat to world economy.
In coming times, the rating agencies – S&P, Moody and
Fitch have warned that all 17 Euro zone nations could face a risk of rating downgrade,
including those of France and Germany who have so far enjoyed the prime rating
of 'AAA+'.
Considering all, let's take a look at each asset class and
explore the opportunities and threats:
Equity:
Going forward we think that global economic news disseminating
from the developed economies - especially the Euro zone would continue to drive
the sentiments in the Indian equity markets. Looking at the global scenario and
economic data, we believe in the short term, the equity market will be bearish.
Though the net sales by FIIs has been only approximately 1700 crores, the
situation could get worse if selling intensifies.
Valuations today are much better for equity investments
(however they could get better), investments made during such times will return
abnormal returns in the next few years but one could see red in the short term.
Keep a guarded approach, going extremely slow in making one
time investments in equity and invest primarily through SIPs and DIPs (one time
investments on days when the market falls). This has been one of the best
strategies to capitalize on the current market volatility.
On the positive side, interest rates should start coming
down starting next financial year. Also, monsoon rains were 2% above average. A
good monsoon season can typically boost rural farm incomes and have an impact
on the wider economy through increased spending on consumer goods as well as
reduced prices of food items. In addition, with developed world expected to
slow down, we expect commodity prices to fall further in the next several
months. These are all excellent triggers for the equity markets and at a
certain point of time when Euro-zone worries slow down, these triggers will
play a role in determining the direction of Indian equity markets.
Cash will be king in 2012 as a lot of asset classes could
come under pressure in light of liquidity crunch and risk aversion.
Gold:
Gold prices have corrected from the record high of USD 1,924
an ounce in September 2011 to USD 1,570 an ounce on 14th December 2011 as
investors sold to cover their losses elsewhere coupled with profit booking by
fund managers near a year end. Since October 2011, gold has corrected by
15-20%, however the depreciation of Indian Rupee (depreciated by around 18%
since August 2011) has helped the prices to remain firm in INR terms. We
believe profit booking would still come in gold, however the depreciating
Indian Rupee would act as a cushion to fall in prices globally.
Going forward gold prices would pave their path depending on
how the global economic headwinds unfold. If downbeat global economic data is
disseminated, along with inflation pressures persisting in the Emerging Market
Economies, gold would continue its up-move. However, any intermediate positive
newsflash may bring in a marginal correction in prices of gold. Hence, nothing
has changed for gold and we believe it will continue to maintain its upward
trend in the medium to long term. In fact, we believe that such corrective
phases are opportune times to invest in gold and safeguard against global and
domestic economic risk. But like paper money, gold is only worth what people
believe it's worth. To sum up, investment in gold should be scaled up, to
atleast 15% of the portfolio.
Real Estate:
The impact of slowdown has already been felt in the real
estate market. Apart from demand slowdown, impact of rising cost of funds,
increasing construction cost and delays in government approvals is worsening
the already dismal condition of the sector. Like any other sector, the
aforementioned factors clearly point towards a price correction in the real
estate market. However, residential prices in most of the cities have either
remained steady or increased marginally in the past few quarters. This implies
that demand-supply conditions are not having any significant impact on the
residential market prices in the short term and there are other factors at play
which are having a greater influence on price.
Financial condition and holding capacity of real estate
players are such factors which influence the price movement in the market to a
great extent. To understand, we did quick numbers and found that since FY 08,
revenues and profits have dropped by 19% and 70% respectively, despite property
prices witnessing an increasing trend during the period. On the other hand,
debt and interest outgo have increased by 1.5 and 2.3 times respectively, in
the same period. The equity fund raising has almost dried up through stock
markets. Further, over the last two years, developers have raised huge amount
of debt and equity through private placements and other innovative manners,
this option too now practically looks exhausted.
In FY 08, when the global economy was going through a
recessionary period, the stress level of the sector was at its highest level
and many developers were on the verge of defaulting on their debt payment.
However, the Reserve Bank of India (RBI) had allowed banks to restructure the
debts of these companies keeping in mind the recessionary condition of the
economy and hence giving the much needed breather. But the possibility of this
happening in the current scenario is very bleak and looking at the stress level
of the industry, the road ahead for real estate industry looks bumpy.
Interestingly we have entered the phase where real estate
companies are going to raise capital for project completion and debt repayment
rather than for expansion plans. However, some of them are launching new
projects which are due in 2016-2018, so that money could be utilized for
existing projects. We believe that till the time real estate players are able
to raise additional long term funds in order to meet their short term
obligations, residential prices will remain steady. However, there is always
the possibility of some players who are not able to raise fresh funds easily
will have to offer better deals to investors or will be forced to reduce prices
in order to meet the short term cash flow requirement.
As mentioned in our last report, this could well turn out to
be a great time for HNI's and Institutional investors to strike good deals with
builders. Some of the institutional investors are striking debt deals with
builders at a coupon of 20-24%.
Debt:
In spite of deregulation of saving bank interest rate,
considering tight liquidity in the system, we continue to maintain that it is
extremely important to keep short term money from saving and current account
into liquid plus funds to earn higher post tax returns. Liquid plus funds are
giving returns of around 7% (100-150% higher returns post tax than saving (currently
4-6%) and short term fixed deposits). If you are a fixed deposit investor, it
makes sense to go with tax free bonds such as NHAI ,and PFC that are delivering
a tax free return of 8.2-8.3%. However for shorter tenures ,good quality FMPs
are a better option than FD's as they offer higher post tax returns. However,
FMPs should be done for a period of 3 years as higher post-tax yields are
locked in. Short Term Bond Funds are excellent opportunities for a time
horizon of 12 -18 months.
In short, the preferred debt investments are Liquid Plus funds for 3-6 months
horizon, FMPs for 3 year horizon, and Short Term Income Funds for 12-18 months
horizon.
Considering the recent pause by RBI, we believe interest
rates are at elevated levels and almost nearing their peak makes longer tenor
papers attractive. These are the excellent time for gradually taking exposure
to long term government securities funds. As interest rates fall, investor
gains capital appreciation on their investment along with the coupon payable by
the issuer (In short there could be a 15-20% return in such investments.
However, there could be negative returns also because of interest rate
volatility and hence suitable for aggressive investors). Investments in GILT
funds, when yields on 10 year G-Sec are above 8.8-8.9%, could be a good
investment option for 18-24 months (Since interest rate movements can be swift,
we generally do not take GILT calls for trading gains).
In short 2012 can be a very interesting year to lock in
deals in different asset classes.
Wish you and your family Merry Christmas & a very Happy, Healthy , Safe and
Prosperous 2012.
Source: http://www.moneycontrol.com/news/mf-experts/whatsstore-forinvestorsthe-new-year_641850.html
Posts
