The last trading week was worse for the Indian market as it saw almost all sectoral indices end in the red. Infrastructure sector was the worst hit, followed by technology, metals and banking sector. Sensex and Nifty were down by 3.2% and 3.1% respectively. CNX Midcap index was down by 3.2%, BSE Smallcap index down by 2.9% over the week. BSE Realty index was down by 4%, BSE Bankex was down by 4.2%, BSE Metal index was down 4.5%, BSE IT index was down 4.5% and BSE Auto index was down by 2.3%
Domestically, during the last trading week, Index of Industrial Production (IIP) numbers were announced which according to us are not reliable at all. The announced numbers were much below than market’s expectation. March 2012 IIP declined by 3.5%. This was due to a sharp decline in the manufacturing sector. The February 2012 IIP numbers remain unchanged at 4.1%. For FY2012, the IIP growth stands at 2.8% as against 8.2% in FY2011. The other key development included the Finance Ministry deferring the applicability of General Anti-Avoidance Rule (GAAR) provisions by one year i.e. it would now be applicable to income of Financial Year 2013-14 and subsequent years. The amendments that are likely to be made by the committee would be out by the end of this month. To tackle with the rupee depreciating situation, Reserve Bank of India (RBI) has directed exporters to convert the 50% of the foreign exchange in Exchange earner’s Foreign Currency (EEFC) Account and credit it to the rupee accounts and access the forex market for purchasing foreign exchange only after utilizing fully the available balances in the EEFC accounts.
Globally, markets were under pressure owing to fears that the European region debt crisis would deteriorate further on account of the election outcomes of Greece and France. To add to the woes, signs of slowdown in China are clearly visible as Chinese economy has emerged with much weaker than expected imports for April as well as a month-on-month fall in exports to US, Europe and Japan. Imports rose 0.3 per cent, much lower than economists' expectations for a 10 per cent rise and March's 5.3 per cent increase. On the other hand, Chinese Exports rose 4.9 per cent in April from a year earlier, missing economists' expectations for an 8.5 per cent increase and much weaker than the 8.9 per cent export growth in March. China's GDP growth hit its slowest level in three years in the first quarter of this year at 8.1 per cent against 8.9 per cent for the previous quarter and is likely to slow further if current trade trends continue over the next two months.
We believe that market is facing headwinds like higher crude oil prices, elevated inflation and interest rate levels leading to liquidity crunch but on a longer term basis, equities would provide wealth creation opportunity. The idea of shifting to bonds/other debt instruments and fixed deposits may not be prudent at current levels of domestic bourses to beat the current levels of inflation. Historically, it has been proved that a bear phase witnesses a turnaround and bully rally is witnessed. For example: 2002-03 was pessimistic in India after the technology boom, but subsequently investors witnessed one of the greatest bull markets we have ever known in this country. The index went from 3,000 to 18,000.
We believe, bear phase is part of the wealth creation game. Real good money is generally made by investing in equity during these bad times only.
At the current level of 16,292, the Sensex trades at a PE of 15x FY12E street earnings estimate and 13x FY13E street earnings estimate. At 13x, we trade below average valuations of 15.4x 1 year forward earnings. In our view, investors with a long term horizon of 1-2 years can consider accumulating stocks like MCX, State Bank of India, BHEL, Larsen and Toubro, Nestle, State Bank of Bikaner and Jaipur, Axis Bank, HDFC Bank, Bank of Baroda, Oil India, Glenmark Pharma, Astra Zeneca Pharma, Swaraj Engines, IDFC, ICRA and Titan Industries.
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