The markets seem to be meandering in search of a push to move on in some direction. In the Indian context, most concerns seem to have been brushed under the carpet by the flood of FII inflows which seem to hold up the market at its current levels.
Considering the FY11 trend of outflows seems to have been stemmed, the situation could continue till the US recovery takes root and excess liquidity is pulled out. The impact of the recent Portugal SOS will unravel over the next few weeks. Inflation more than anything else seems to be getting us intertwined with global issues.
Japan’s rebuilding effort should impact the demand for commodities, energy sources fuelling inflation. The Middle East political scenario and the oil price hikes will continue to provide our economists with edge-of-your-seat thrills. It would be difficult to say with any degree of certainty that all the above have been factored in well enough by current market prices.
In such a scenario, it should hardly be surprising that most analysts have chosen to keep their powder dry till they see what the March 2011 results have in store before hazarding upgrades or downgrades for FY12.
The Q4 earnings are expected to be under pressure as a result of higher input costs due to persistent inflation and rising interest rates despite robust top line growth. I do not believe the competition will allow most businesses including banks to pass the burden down to their customers.
The Sensex sector estimates indicate that automobiles overall will come up with a reasonable show on the back of good sales although input costs could result in patchy bottom lines. Financial services with support from banks which benefit from higher credit growth and higher CASA are also expected to do well.
A moderate result supported by capital goods may be seen from the industrial manufacturing sector. Metals are expected to benefit from margin improvements and IT from higher billings. Cement, construction and telecom are widely expected to pull down the overall index performance.
The year ending Dec 2010 saw record inflows of about USD 75 bln in debt, ECBs and equity. This possibly indicates that empowered overseas investors who have the ability to compare emerging markets remain undeterred by the recent headlines on corruption and politics.
However, while our relatively stronger macro-economic fundamentals and longer term prospects will continue to attract FDI inflows, the same cannot be said for portfolio investments. Surely FIIs should have learnt by now that they can influence this market at will and don’t have to be too concerned with the fundamentals in the shorter term.
We could well see downgrades in FY12 estimates of anything from 5 to 8 percent. In which case, left to fundamentals, one could even expect a correction of 8 to 10 percent but the FII portfolio inflows may yet again decide to give this the go by for the moment.
All said, the retail investors saving money for long-term goals should stick with their asset allocation and continue to take the SIPs route into equity mutual funds.