2013 equity market outlook - fundsupermart€¦ · birla sun life asset management company ltd. o...
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Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
2013
Equity Market Outlook
1
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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.
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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…
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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 (%)
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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..
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
Source: CMIE, BSLAMC Internal Analysis
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%
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
Source: CMIE, BSLAMC Internal Analysis
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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..
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
Source: CMIE, BSLAMC Internal Analysis
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%
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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%
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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.
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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.
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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
Copyright: Birla Sun Life Asset Management Company Ltd. 2008
Birla Sun Life Asset Management Company Ltd.
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