The World This Week December 24 - December 28 2012
The World This WeekDec 24 – Dec 28, 2012
Equity View: In CY 12 Nifty ended with an upside of almost 27%. We witnessed one of the best years for FII inflows in 2012, with total inflows crossing $24 billion. The key event this year was witnessed from the month of September when we saw pro-activeness from the Central government as several reform measures were being been pushed. Key measures among this were the diesel price hike, LPG subsidization, banking reforms bill and forward movement on FDI in retail. We believe that the government will continue to take measures towards the fiscal consolidation and reform action would continue to happen in 2013. We believe that the global situation has calmed down considerably in last one year. However, the Indian alumni believed that Europe is moving slowly towards fiscal and political union. We believe that we might keep hearing news from Europe throughout the current year, but we don’t expect any surprise which can terribly rattle the asset market across the world. U.S. has seen a very strong last 2 quarters with 3% plus of GDP growth - which by US standards is very good growth rate. The unemployment rate is also at a 3 year low. We believe that all the talks about the fiscal cliff will get settled in January 2013 itself. The politicians on both side’s i.e. republicans and democrats will continue posture but eventually an agreement will be reached. The markets have already started looking beyond the fiscal cliff negotiation in the US. We believe that CY 2013 would be a good year from a macro economic perspective for United States. The Chinese economy is showing clear signs growth bottoming out. The PMI data for December 2012 is at 16 month high and this can be attributed as a significant sign of macro improvement. As both Europe and China are in a much better condition than what they were in the last 2 years, we believe that the global situation is going to be much better and conducive to equity markets in 2013 as compared to it was in 2011 and 2012. In India, GDP growth continues to stagnate at 5-5.5% for last three quarters, pulled down by poor performance of manufacturing and agriculture sectors. Q3 FY13 number should also be subdued as the full effect of weak monsoons would be seen when Rabi crop is harvested this quarter. However, we don’t expect any further moderation and believe that the worst is behind us. The capital formation activity showed signs of revival last quarter raising hopes that the capex cycle has bottomed out. With services expected to grow at robust 7.5%, full year growth should stabilize at 5.6%. We believe that the steps taken by the Government on the fiscal front will give RBI the necessary cushion to carry out rate cuts starting January which will help in reviving growth. The key to growth revival is the revival in the capex cycle for which low interest rates are an imperative. The fiscal consolidation drive should move ahead with further deregulation of diesel and kerosene prices in 2013. We should see 100-125bps cut in interest rates in 2013 which should give a major boost to stock markets. The key risk factor for Indian markets remains the political stability and the government’s ability to push through fiscal consolidation which might lead to some kind of disappointment in the market. There are lot of talks about further price de-regulation of diesel & kerosene. The crude oil prices are expected to stay flattish in 2013. However, if there is a sharp up move in crude oil prices, it would further strain
India’s fiscal and current account situation. RBI might also find it difficult to carry out the necessary rate cuts if inflationary pressures become volatile. These are the three main factors - political stability, crude oil prices and inflation numbers - which play a very important role for the equity markets to play well. We believe that going forward, markets will reconcile to the fact that trend growth rates have come down, and could settle at 6-6.5%. This is the new normal for Indian growth. From a global perspective, it is still a healthy number. We expect inflation would come down this year and could average around 7% leading to nominal growth of 13-14%. That would lead to corporate earnings growth of around 15%. We expect equity Market Returns of 25-30% this year backed by 13-15% earnings growth and a P/E rerating from 14x to 16x on the back of rate cuts, revival in growth and fiscal consolidation. We have arrived at a December Sensex target of 25,300 which is almost a 30% upside from the current levels and Nifty target is of 7700.News:DOMESTIC MACRO: Indias advance tax receipts grew an annual 10.4 percent to 782.3 billion rupees in the first 20 days of December, the finance ministry said in a statement on Monday.GLOBAL MACROEURO The worst of the euro zone sovereign debt crisis is over, German Finance Minister Wolfgang Schaeuble has said in an interview. Schaeuble said governments in heavily indebted countries such as Greece have now recognised that the crisis that began in Athens three years ago will only be overcome by implementing bitter reform measures.US Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 350,000. The number of Americans filing new claims for unemployment aid fell last week to nearly its lowest level in 4 1/2 years, a possible sign that employers have picked up the pace of hiring. Standard & Poors Ratings Services said on Friday it does not expect U.S. lawmakers negotiations over the "fiscal cliff" to have an impact on the sovereign credit ratings of the U.S. federal government.China Chinas central bank will use various tools to ensure steady credit growth to support the economy while pursuing financial reform in the face of weakness and uncertainty in the global economic outlook, it said in comments published on Friday. Annual growth of Chinas industrial profits quickened to 22.8 percent in November from Octobers 20.5 percent, official data showed on Thursday, reinforcing signs of a steady economic recovery thanks to pro- growth policies.
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