Even in USD terms, India is the fifth best performer among large emerging markets
The Indian market is one of the best performing equity markets among Asian and Emerging markets this year. In 2012 YTD, the Sensex has moved up 16 per cent in local currency terms and 9 per cent in USD terms. Even in USD terms, India is the fifth best performer among large emerging markets.
Recent outperformance seems based on hopes of policy implementation. But such hopes seem to be getting continuously postponed – 2012 has been a year of “shifting milestones”. At a 12-month forward PE of 13.6 times the Sensex is neither cheap nor expensive (long term average is 15.2). Historically the Indian market bottomed out at 12-12.5 times and we are about 10 per cent higher than those levels.
The rainfall related concern seems to be getting behind us post massive monsoon precipitation in North and North-West India since mid-August. The current All-India monsoon deficit (-13 per cent) presents a much better picture than in early July (25-30 per cent). That said, there are initial signs of declining demand in consumer discretionaries – particularly two-wheelers.
This is clearly worrying because consumption seems to be the only leg that the Indian economy is running on. Even in the property sector smaller unlisted developers have begun to default on their loans to banks, as our channel checks reveal.
It’s not yet a certainty, but equity and commodity markets seem to be pricing in some form of QE announcement. The bulk of QE impact comes in the first month after announcement – reflected in 10-12 per cent market movements on previous occasions. Predictably the high beta sectors – banks, metals, property, auto and engineering – tend to outperform.
The best portfolio stance to balance the possibilities of domestic disappointment and global liquidity injection seems to be a “feet in two boats” approach – i.e. maintaining exposure to the likely QE beneficiary sectors – but through stocks that are of relatively better management quality and have overseas exposure – preferably in developed markets.
We are overweight on pharmaceuticals, engineering, utilities and IT Services. We are underweight on consumer staples, banks and metals. We are neutral on auto, telecom and energy.
Stock selection and rebalancing the model portfolio
As usual our portfolio construction remains bottom-up – i.e. we focus on good stocks that we want to own and stock weights add up to sector weights. Exhibit -1 summarises the changes.
The main themes governing our stock selection are: 1) decline in consumption demand, particularly for discretionaries, 2) reduce beta selectively, in anticipation of market correction, and 3) increase defensives and select high beta stocks with visible catalysts.