Indian bourses had a tumultuous year hitherto with the indices rallying in the first half only to give up all the gains in September and October.
Indian indices seem to have reached an inflection point where the events that occur now could largely govern and impact the direction we take over the next year.
We saw that outperformance and underperformance this year has largely been sector-specific, unlike previous bull and bear runs which we have to know to be more inclusive.
The biggest dent has been gross underperformance from the midcap and small-cap sectors which have corrected more than 20-30 percent in some cases.
With the festivities around the corner, demand does not seem to be picking across sectors, be it auto or textile manufacturers forecasting a lackluster season this year.
On the macroeconomic front, most of the reforms brought about by the Modi government look to have long-term positives for the economy, even though the short-term implications might have been hard for many industries be it small and large to deal.
The overhang from higher crude prices and a depreciating currency will continue to cast a shadow over the Indian sentiment.
With elections looming upon us and at this inflection point let’s look at some of the sectors that might be at tomorrow’s forefront.
a) Real estate:
Real estate in India remains largely overvalued, the cultural phenomenon associated with owning a home in many cases overpowers the yield this asset pays out. Rental yields in India at between three to four percent do not warrant the premium we pay for real estate in most cases.
We feel this sector is due for a large correction and continue to remain underweight here. Systemically over the longer term, we would expect this asset class to fall in line with global peers, the advent of RERA and new regulations could go a long way in bringing about better price discovery in this sector.
Weak investor and consumer sentiments ate up into the festive gains of automobile manufacturers in October resulting in tepid sales growth for leading car manufacturers.
While the market leader Maruti Suzuki saw marginal year-on-year growth of 1.5 percent in domestic sales in October at 138,100 units, Hyundai Motors India registered a 4.9 percent growth in domestic sales during the month at 52,001 units.
Slowing auto demand is one of the first precursors to foretell the health of an economy, weak auto demand today in the commercial sector may manifest into weakness in the overall economy next year.
C) IT and Pharma:
A depreciating rupee has aided this sector, which could well be considered the saving grace in the fall we are witnessing now. These sectors are largely export-oriented, and a five percent correction in the rupee will add to margins substantially. Bear in mind this advantage only lasts over a few quarters post which the macros generally realign.
To summarize the overall outlook, though most sectors look to be slowing down on a relative basis, we remain one of the fastest growing economies today.
We maintain a neutral outlook for the next 12 months and see further room for correction with the benchmark indices still trading at valuations higher than the long-term mean post this correction.
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