2013 Equity Market Outlook - Fundsupermart€¦ · Birla Sun Life Asset Management Company Ltd. o...

Copyright: Birla Sun Life Asset Management Company Ltd. 2008

Birla Sun Life Asset Management Company Ltd.

2013

Equity Market Outlook

1



2012: The year that was

2013: The year of mean reversion

Inflation and Interest rates to head lower.

Investments and GDP growth to turn up

Policy paralysis yielding way to intent to reform

Global policy much more supportive than a year ago

Corporate earnings to catch up with nominal GDP trend

INDEX

2



3

4%

5%

6%

7%

8%

9%

10%

11% WPI RBI repo rate

9.2%

8.0%

6.7% 6.1%

5.3% 5.5% 5.3%

0%

2%

4%

6%

8%

10%

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

7

8

8

9

9

10

Jan-1

0

Ma

r-1

0

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Ma

r-1

1

May-1

1

Jul-11

Sep-1

1

Nov-1

1

Jan-1

2

Ma

r-1

2

May-1

2

Jul-12

Sep-1

2

Nov-1

2

40

45

50

55

60

Dec-0

9

Feb-1

0

Apr-

10

Jun-1

0

Aug-1

0

Oct-

10

Dec-1

0

Feb-1

1

Apr-

11

Jun-1

1

Aug-1

1

Oct-

11

Dec-1

1

Feb-1

2

Apr-

12

Jun-1

2

Aug-1

2

Oct-

12

WPI Inflation moderated to 7.5% versus 9-

10% in 2011

Growth slowed further to 5.3-5.5%, But

seems to have bottomed out After depreciating 18.7% in 2011, rupee

depreciated further 3.2% in 2012

10yr Gsec yields rallied from 8.35% in

early Jan to 8.15% in Dec 2012

2012 : A year of slowing growth and moderating

inflation



4

-5.3%

-1.3%

7.4%

8.4%

9.4%

9.4%

11.0%

15.6%

15.7%

20.0%

21.2%

-8.0% 0.0% 8.0% 16.0% 24.0%

BOVESPA

SHANGHAI

DJIA

FTSE100

NIKKEI 225

RTS INDEX

TWSE (TAIWAN)

NASDAQ

KOSPI

Sensex

HANGSENG INDEX

USD Returns - Major Indices

-2.2

10.8

18.8

24.5

33.1

36.3

37.3

38.2

44.3

46.8

54.6

-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

BSE IT

BSE Oil & Gas

BSE METAL

BSE Sensex

BSE Capital Goods

BSE MID CAP

BSE Healthcare

BSE AUTO

BSE CD

BSE FMCG

BSE Bankex

15000

16000

17000

18000

19000

20000

Jan

-12

Jan

-12

Feb

-12

Mar

-12

Mar

-12

Ap

r-1

2

May

-12

May

-12

Jun

-12

Jul-

12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

Oct

-12

No

v-1

2

Dec

-12

BSE Sensex up 25% YTD

-530

834

1333

-27

1207

730

262

-214

278

-558 -1000

-500

0

500

1000

1500

CY08 CY09 CY10 CY11 YTD12

FII

DII

Sector Returns

Institutional Flows (Rs Bn)

Source: Bloomberg, SEBI

2012 : Equity Markets climbed a Wall of Worry



2012: The year that was

2013: The year of mean reversion

Inflation and Interest rates to head lower.

Investments and GDP growth to turn up

Policy paralysis yielding way to intent to reform

Global policy much more supportive than a year ago

Corporate earnings to catch up with nominal GDP trend

INDEX

5



Looking ahead towards 2013

6

o Inflation (WPI) to average 6.5% in CY13

o Effective easing 75-100bps (through Repo & CRR cuts)

o 2013 GDP growth to recover to 6.25%-6.5% from 5.5% in 2012

o Earnings growth to mean revert and catch up with nominal GDP trend,

driven by

Revenue growth revival as growth economic recovers

Net Profit margins benefit as interest cost comes down

o Market returns to be driven by EPS growth and current dividend yield.



Source: Bloomberg, BSLAMC Internal Analysis

7

Global Commodity Indexes

0

50

100

150

200

250

300

350

400

450

500

0

100

200

300

400

500

600

700

800

900

1000

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

GSCI Commodity Index, LHS CRB Commodity Index, RHS

Range-bound commodity prices despite

significant global monetary easing…



Source: Bloomberg, CSO, BSLAMC Internal Analysis

8

Headline WPI Versus CRB Commodity Index (in Rs)

-2.5

0

2.5

5

7.5

10

12.5

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

CRY YoY (LHS) WPI (RHS)

Expect inflation to average 6.5% in CY13



As a result of lower inflation, we expect RBI to

cut rates by 75-100bps in 2013

Source: CSO, BSLAMC Internal Analysis

9

0

1

2

3

4

5

6

7

8

9

10

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0% WPI YoY %, LS WPI Estimates, LS RBI Repo Rate, RS

WPI Inflation (YoY) Versus RBI Repo Rate (%)



o UPA Govt decision to risk TMC’s support demonstrates unquestionable will

to reform.

o Since then major decisions have been taken on:

FDI in Retail, Aviation sectors

Focused PSU stake sale program to raise funds

Fuel price hike and cap on subsidized LPG

Stage I Forest clearance to few large coal blocks

Passed Companies bill, Banking Law Amendment bill

Constitution of Cabinet Committee on Investments to monitor large projects

Policy & Politics

10

Policy Drive



Source: CMIE, BSLAMC Internal Analysis

11

We believe recent reforms to form a Cabinet Committee on Investments (CCI) a positive step to resolve backlog of stalled projects

“Stalled” Projects Under Implementation (Rs Bn)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-12

Others Chemicals

Metals & Metal Pdts Construction & Real Estate

Services Ex Financial Electricity

CCI can have a significant impact on

investments picture..




12

Cabinet Committee on Investments (CCI), lower interest rates and positive equity markets will all help drive a pick-up in investments

Gross fixed capital formation (YoY)

7.90%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

GFCF 30 yr Trend

Lower interest rates and policy drive to result in

overall Investments growth of 7%




13

0

1000

2000

3000

4000

5000

6000

7000

8000

9000 Project invsts added during the qrtr (INR bn.)

Though, one should not expect a return to the

2004-2008 investment boom era



Source: CSO, BSLAMC Internal Analysis

14

Personal loan growth has flat-lined over last 12 months

Housing loan growth has slowed to 13.7% in the last 6 months from

16.8% growth in first half of 2011

RBI Repo Rate Vs Personal Loan Growth (%)

-10

0

10

20

30

40

4

5

6

7

8

9

10

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Repo Rate, LS Personal Loans, RS

RBI Repo Rate Vs Housing Loan Growth (%)

0

10

20

30

40

4

5

6

7

8

9

10

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Repo Rate, LS Housing, RS

We expect consumption growth to pick-up on

back of RBI rate easing..




15

Private final consumption expenditure (YoY)

5.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

PFCE 30 yr Trend

Overall, consumption growth should recover to

long term trend of 5.4%



Source: RBI, BSLAMC Internal Analysis

16

India GDP Growth (YoY)

CY2013 GDP growth to trend towards 6.25-6.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

GDP Growth 30 Yr Trend 6.25%



Corporate Earnings to catch up with Nominal GDP

17

0

200

400

600

800

1000

1200

1400

1600

1800

Nominal GDP Sensex EPS Indexed to 100

Source: Motilal Oswal, Business Beacon



Revenue growth to improve with economic

recovery

18

-10%

-5%

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%

30%

35%

Revenue Growth % YoY (LHS)

IIP % YoY 3mma (RHS)

0%

5%

10%

15%

20%

25%

0%

5%

10%

15%

20%

25%

30%

35%

Revenue Growth % YoY (LHS)

M1 growth % YoY (RHS)

Early signs of recovery provided by easing monetary conditions (M1 growth)

Revenue growth and Industrial Production move

together RBI induced money supply leading revenue

Source: Bloomberg, RBI, Capitaline



0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Interest cost to PAT

Trailing 4 Qtr Avg

Interest cost saving would boost PAT margins

19

Interest costs deduct substantially from profits; any reduction due to decline in policy rates

would flow directly to pre-tax profits.

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0% Interest Cost (% of Debt)

Source: Bloomberg, RBI, Capitaline



1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

1550

FY12 FY13 FY14

Consensus Earnings Expectations bottoming out

20

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-11

Ma

r-1

2

MSCI India Earnings Revision Index Trajectory of Consensus estimates for

Sensex EPS (Fiscal Years)

Percentage of

earnings upgrades

less downgrades

Source: Bloomberg, Morgan Stanley



Supportive global policy has resulted in

benign risk appetite

21

0

100

200

300

400

500

600

700

Italy 5 Yr CDS Spain 5 Yr CDS

Risk premiums have come off, as reflected in cost of insuring against sovereign default risk



Sectoral valuation divergence at 10 year highs

22

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Defensive vs. Cyclical Sectors – P/B deviation from trend

Defensive and Cyclical sectors valuations divergence indicate market is willing to pay extremely high price for

growth visibility, stability and quality. A recovery in economy would shift focus towards cyclical business as

earnings recover and valuation gap narrows.



Relative Sectoral Valuations – Defensives vs

Cyclicals

23

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Pharma LT Avg +2 SD -2 SD

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00 FMCG LT Avg +2 SD -2 SD

0

0.5

1

1.5

2

2.5

3

Engineering & Cap Goods LT Avg +2 SD -2 SD

0

0.2

0.4

0.6

0.8

1

1.2

Metals LT Avg +2 SD -2 SD

Defensives vs. Nifty P/B Cyclical vs. Nifty P/B



Valuation divergence within sectors as well

24

0.8

1.3

1.8

2.3

2.8

3.3

Pvt / PSU Banks PB Ratio avg +2 SD -2 SD



Valuation & Outlook

25

Metals

IT

Oil & Gas

Utilities

Pharma

Engineering

PSUbanks

Auto FMCG

Cement

Pvt Banks

Telecom

(3.00) (1.00) 1.00 3.00

Wo

rse

----

----

----

----

OU

tlo

ok

----

----

----

----

----

Go

od

Realtive Valuation: No. of Standard Deviations from Mean

o Key OWs

o BFSI

o Cement

o Auto

o Key UWs

o FMCG

o Oil & Gas



Equities look cheap relative to other popular

asset classes

26

-

0.5

1.0

1.5

2.0

2.5

3.0

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Sensex relative to Real Estate

Sensex to Real Estate Index Ratio

Trend

With reversal to trend over next 5 years, equities

can deliver 65% higher returns (10.5% pa) above

gold.

With reversal to trend over next 5 years, equities

can deliver 20% higher return (3.7% pa) above

residential real estate.

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

19

90

19

91

19

92

19

94

19

95

19

96

19

98

19

99

20

00

20

02

20

03

20

04

20

06

20

07

20

08

20

10

20

11

20

12

Sensex to Gold Ratio

Sensex to Gold Ratio

Trend



Sensex Potential Return: Scenarios

27

Economic

Condition EPS Growth*

EPS in

FY19 PE Ratio** Sensex Value

Expt.

Return***

Bear Case

10%

(5% GDP + 5%

Inflation)

2,210 13.41 29,631 10.34%

Normal

13%

(6% GDP + 7%

inflation)

2,528 14.9 37,665 15.69%

Bull Case

15%

(8% GDP + 7%

Inflation)

2,760 16.39 45,230 19.95%

* Over 5 years EPS growth assumed to equal nominal GDP growth **Long Term Avg PE of 14.9; Bear Case at 10% lower, Bull case at 10% higher *** Includes dividend yield of 1.5%

Equities offer attractive return opportunity over a 5 year time horizon.



1. Union Budget 2013-14 would be first

milestone where the Govt would show

its tilt on populism/ reform

2. Opposition well aware of UPA’s

populist tactics before polls; hence,

major announcements unlikely to

happen.

3. Govt is likely to spend next 6-9

months in preparing a base of

favourable macro parameters from

where it can launch meaningful

election campaign.

4. Hence, Govt is likely to unveil major

populist moves late in the year only.

Policy & Politics

28

Political Drive

State Election Due Incumbent Party

Meghalaya Feb-13 Congress

Nagaland Feb-13 Nagaland People's

Front

Tripura Feb-13 CPI (M)

Karnataka May-13 BJP

Rajasthan Nov-13 Congress

Madhya

Pradesh Nov-13 BJP

Chhattisgarh Nov-13 BJP

Delhi Nov-13 Congress

2013 : A busy year for pollsters



o Earnings growth to mean revert and catch up with nominal GDP trend ~14%.

o Our base case is for market to return 15% over next 12 months with no

valuation re-rating. As the country heads towards elections, political

developments may result in front loaded return trajectory.

o Earnings downgrade cycle has bottomed and may see an upturn. In such a

scenario, slightly higher EPS growth and valuation upside can result in 20%+

returns.

o Sector valuation divergence historically high, to trend towards mean. Therefore,

sector allocation to drive significant alpha generation over passive investing.

o We prefer interest rate sensitive, domestic cyclical, select asset and value

plays.

o Equities are also cheap in comparison to other popular assets such as gold and

real estate. Over next 5 years, equities are likely to deliver much higher returns

versus these assets on post tax basis.

Equity Outlook

29

30

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