ICRA maintains cautious outlook on Indian equity markets
ICRA Equity Research Service has come out with its report on Indian Equity Markets. The research firm has maintained cautious outlook on Indian equity markets, in its July 12, 2011 report.
July 14, 2011 / 11:48 IST
ICRA Equity Research Service has come out with its report on Indian equity markets. The research firm has maintained cautious outlook on Indian equity markets, in its July 12, 2011 report.
Indian equity markets have underperformed the global and emerging equity market indices over the last 12-18 months due to culmination of headwinds like high commodity prices (mainly crude oil above 80 $/Barrel), elevated inflation (WPI 8-10%), significant monetary tightening (+275 bps), slower industrial growth, weak investment cycle, premium valuation relative to other markets leading to muted capital inflows, further accentuated by complete lack of reforms, policy paralysis and poor governance.While strong corporate earnings growth and flat Indian equity indices over the last 12-18 months has resulted in healthy time correction making the valuations appear more reasonable, the impact of gradual unwinding of the massive fiscal and monetary stimulus by the developed economies, monetary tightening by emerging economies and ongoing sovereign debt crisis in peripheral Eurozone would be crucial for the market. The market could turn bullish on Indian Equities if global economy continues to recover modestly and the currently elevated global commodity prices moderates with stability Mid-East and North Africa and end of Quantitative Easing (QE2) by US Fed.While any faltering of global economic recovery in 2H 2011 could lead to risk aversion and capital outflows from emerging economies, we think that the simultaneous correction in commodity prices could reduce inflationary pressures, boost corporate earnings and provide downside protection to the valuation multiples assigned to Indian equities. Besides, incase of steeper than expected economic slowdown or rise in systemic risks due to catastrophic events (like sovereign defaults), we expect further calibrated actions by central banks would boost liquidity and support asset prices globally.GDP Growth to moderate due to monetary tightening
With inflation expected to remain elevated in near term & transmission of monetary tightening likely to continue, consumption growth is expected to dampen to an extent in the coming quarters. In addition to the adverse impact of interest rates, volatility in commodity and fuel prices may have an impact on investment decisions. We expects economic growth to moderate, albeit to a healthy ~7.8% in 2011-12.Commodity prices and Inflation to moderate:
While normal rains (as expected by the Indian Meteorological Department) is expected to moderate food inflation going forward, slower economic growth in developed economies (mainly US and Japan), monetary tightening induced slowdown in emerging economies (mainly China & India) and end of QE2 are expected to ease the elevated commodity prices and moderate inflation over the next 3 to 6 months.Interest rates to peak out in 3-6 months
While RBI is expected to remain predominantly hawkish in the near term due to persistently high inflationary pressures, we think that the recent downward turn in global macroeconomic indicators may soften commodity prices and limit the 15-month rate tightening cycle to a further 25-50 bps over the next 3-6 months. However, we expect the investment / capex cycle to remain sluggish and interest rate sensitives like banks, real estate and automobiles to remain laggard over the near term.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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