The fear of recession looming over the markets - Review
1. Why have the stock markets corrected sharply recently?
2. How have Indian equity markets performed vis-a-vis other global markets?
3. How is the Indian economy positioned in the face of global uncertainties?
4. What is the outlook for Indian equity markets going ahead?
5. What is the recommended investment strategy for long-term equity investors?
1. Why have the stock markets corrected sharply recently?
The sudden and sharp decline in domestic equities is in line with the secular weakness in global equity markets over the last few days, fearing the impact of a probable recession in the US triggered by weaknesses in the housing markets and the subprime mortgage crises there.
The magnitude of the recession fears can be gauged by the fact that global markets remained sharply negative despite the record and unexpected rate cut (75 bps) by the US Federal Reserve yesterday.
Indian equity markets witnessed significant FII (Foreign Institutional Investors) outflows of c USD 3 B over the last few trading sessions, adversely impacting market sentiment.
Further, withdrawal of liquidity (estimated at USD 30 B) from the secondary market to fund large IPOs and rollover of derivative positions also contributed to the decline.
The sudden and swift correction triggered large scale forced unwinding of speculative positions in the derivative markets, accentuating the fall.2. How have Indian equity markets performed
vis-a-vis other global markets?
Since last September, when the US Federal Reserve acknowledged the emerging crises in the US and promptly lowered interest rates, Indian equity markets rallied sharply on the back of large FII inflows and sustained domestic economic growth.
However, during the same period global emerging markets remained largely lackluster on niggling fears of the impact of a slowdown in the US on many of these export-oriented economies.
With the resurgence of fresh concerns on the US economy, globally markets have witnessed a flight to safety with investors rushing out of risky assets and shifting into low risk investments such as government bonds. Most emerging equity markets sold off as a result, even as the Indian market declined disproportionately in an apparent catch up with its peers.
Despite the recent sharp correction, Indian equities have delivered relatively good performance over a one-year period.
·
3. How is the Indian economy positioned in the face of global uncertainties?
Domestic economic growth continues to be robust with GDP growth of 8.9% during the Jun-Sep 07 quarter - reaffirming India's position as the second fastest growing economy in the world
Rising prices, which were previously a concern have been reasonably reigned in through a mix of timely monetary and fiscal policy measures by the RBI and the Government. Despite the impending hike in fuel prices and rising food prices, inflation is likely to remain within comfortable levels
Industrial production remains robust aided in large measure by the infrastructure buildout in the economy and rising consumption demand
Corporate profit growth has repeatedly surprised markets on the upside despite pressures of rising input prices, higher interest rates and fears of a US recession. Early indications from the current result season seem to reinforce this stable and sustained growth trend.
Given India's predominantly domestic demand-led economy, it is widely estimated that our growth would be mostly resilient to a US slowdown. Government estimates suggest that a recession in the US would likely shave off a mere 50 bp from our GDP growth - implying that India would remain the second fastest growing major economy in the world.
4. What is the outlook for Indian equity markets going ahead?
The recent correction has wiped off a lot of the froth built up over the last 1-2 months in the small and mid-cap segment and has restored valuation levels relative to their large cap counterparts
At current levels of c16700, the Sensex trades at c15.8-16x FY09 consensus earnings. If this is adjusted for the value of unlisted companies in the books of certain large Sensex constituents, valuation levels dip to historical averages of c14 xFY09 earnings
By most estimates, Indian companies are expected to grow their earnings by c17 - 20% p.a. over the next two years. This growth comes on the back of sustained growth in volumes and profitability
Valuation of sectors sensitive to global trends (e.g. IT, Pharma, Textiles) has reasonably factored in potential weaknesses arising from such linkages
The twin growth engines of infrastructure and consumption that provide significant visibility on account of large project outlays (government estimates peg infrastructure spends at c USD 500 B over the next five years) and derive support from rising incomes are expected to benefit a whole host of industries across the corporate landscape.
With the tailwinds of a conducive global monetary environment coupled with stable domestic macroeconomic factors, monetary policy going forward is widely expected to support economic growth.In summation, India seems to be in a sweet spot of strong domestic growth and good visibility that is insulated from global pressures even as it is in a position to access the required capital to fuel its growth aspirations. Market performance over the medium term will thus benefit from the strong growth story as well as the increased investment interest it shall attract from both domestic as well as global investors. 5. What is the recommended investment strategy for long-term equity investors?
Recent market movements reflect the heightened uncertainty with regard to the US economic outlook and the possible impact of the same on the rest of the world. Increasing evidence of a recession there is likely to keep risk aversion levels substantially high.
This could result in higher short-term volatility in financial markets - both globally and at home with its consequent impact on fund flows over a short period.
Such volatility could throw up interesting entry opportunity for long-term investors who can remain unfazed by near-term market movements. These opportunities could especially arise in the mid-cap segment, which historically has borne the brunt of volatile market phases. Investors should consider a balance of mid-cap funds and actively managed funds in building their long-term portfolios, alongside themes such as Infrastructure, natural resources and Gold.
SOURCE : HSBC
2. How have Indian equity markets performed vis-a-vis other global markets?
3. How is the Indian economy positioned in the face of global uncertainties?
4. What is the outlook for Indian equity markets going ahead?
5. What is the recommended investment strategy for long-term equity investors?
1. Why have the stock markets corrected sharply recently?
The sudden and sharp decline in domestic equities is in line with the secular weakness in global equity markets over the last few days, fearing the impact of a probable recession in the US triggered by weaknesses in the housing markets and the subprime mortgage crises there.
The magnitude of the recession fears can be gauged by the fact that global markets remained sharply negative despite the record and unexpected rate cut (75 bps) by the US Federal Reserve yesterday.
Indian equity markets witnessed significant FII (Foreign Institutional Investors) outflows of c USD 3 B over the last few trading sessions, adversely impacting market sentiment.
Further, withdrawal of liquidity (estimated at USD 30 B) from the secondary market to fund large IPOs and rollover of derivative positions also contributed to the decline.
The sudden and swift correction triggered large scale forced unwinding of speculative positions in the derivative markets, accentuating the fall.2. How have Indian equity markets performed
vis-a-vis other global markets?
Since last September, when the US Federal Reserve acknowledged the emerging crises in the US and promptly lowered interest rates, Indian equity markets rallied sharply on the back of large FII inflows and sustained domestic economic growth.
However, during the same period global emerging markets remained largely lackluster on niggling fears of the impact of a slowdown in the US on many of these export-oriented economies.
With the resurgence of fresh concerns on the US economy, globally markets have witnessed a flight to safety with investors rushing out of risky assets and shifting into low risk investments such as government bonds. Most emerging equity markets sold off as a result, even as the Indian market declined disproportionately in an apparent catch up with its peers.
Despite the recent sharp correction, Indian equities have delivered relatively good performance over a one-year period.
·
3. How is the Indian economy positioned in the face of global uncertainties?
Domestic economic growth continues to be robust with GDP growth of 8.9% during the Jun-Sep 07 quarter - reaffirming India's position as the second fastest growing economy in the world
Rising prices, which were previously a concern have been reasonably reigned in through a mix of timely monetary and fiscal policy measures by the RBI and the Government. Despite the impending hike in fuel prices and rising food prices, inflation is likely to remain within comfortable levels
Industrial production remains robust aided in large measure by the infrastructure buildout in the economy and rising consumption demand
Corporate profit growth has repeatedly surprised markets on the upside despite pressures of rising input prices, higher interest rates and fears of a US recession. Early indications from the current result season seem to reinforce this stable and sustained growth trend.
Given India's predominantly domestic demand-led economy, it is widely estimated that our growth would be mostly resilient to a US slowdown. Government estimates suggest that a recession in the US would likely shave off a mere 50 bp from our GDP growth - implying that India would remain the second fastest growing major economy in the world.
4. What is the outlook for Indian equity markets going ahead?
The recent correction has wiped off a lot of the froth built up over the last 1-2 months in the small and mid-cap segment and has restored valuation levels relative to their large cap counterparts
At current levels of c16700, the Sensex trades at c15.8-16x FY09 consensus earnings. If this is adjusted for the value of unlisted companies in the books of certain large Sensex constituents, valuation levels dip to historical averages of c14 xFY09 earnings
By most estimates, Indian companies are expected to grow their earnings by c17 - 20% p.a. over the next two years. This growth comes on the back of sustained growth in volumes and profitability
Valuation of sectors sensitive to global trends (e.g. IT, Pharma, Textiles) has reasonably factored in potential weaknesses arising from such linkages
The twin growth engines of infrastructure and consumption that provide significant visibility on account of large project outlays (government estimates peg infrastructure spends at c USD 500 B over the next five years) and derive support from rising incomes are expected to benefit a whole host of industries across the corporate landscape.
With the tailwinds of a conducive global monetary environment coupled with stable domestic macroeconomic factors, monetary policy going forward is widely expected to support economic growth.In summation, India seems to be in a sweet spot of strong domestic growth and good visibility that is insulated from global pressures even as it is in a position to access the required capital to fuel its growth aspirations. Market performance over the medium term will thus benefit from the strong growth story as well as the increased investment interest it shall attract from both domestic as well as global investors. 5. What is the recommended investment strategy for long-term equity investors?
Recent market movements reflect the heightened uncertainty with regard to the US economic outlook and the possible impact of the same on the rest of the world. Increasing evidence of a recession there is likely to keep risk aversion levels substantially high.
This could result in higher short-term volatility in financial markets - both globally and at home with its consequent impact on fund flows over a short period.
Such volatility could throw up interesting entry opportunity for long-term investors who can remain unfazed by near-term market movements. These opportunities could especially arise in the mid-cap segment, which historically has borne the brunt of volatile market phases. Investors should consider a balance of mid-cap funds and actively managed funds in building their long-term portfolios, alongside themes such as Infrastructure, natural resources and Gold.
SOURCE : HSBC
