Macroeconomic Outlook
Global growth to revive in early 2010 :
Shares Market
With growth falling to its slowest pace since the 2001–2002 recession, we believe that the global economy will undergo a major downturn in 2009. This is because the financial environment is likely to remain challenging as sustained deleveraging (selling of assets to cover losses) by financial institutions globally will reduce credit growth to very low levels in both the advanced and emerging economies. Besides, deleveraging will continue to put significant pressure on the prices of asset classes such as equity, commodity and real estate around the world.
Despite the various fiscal and monetary actions taken by the governments and central banks around the world,we expect a gradual recovery to get underway only in late 2009 or early 2010. As a result, global growth is expected to revive to 4–4.5% from 2010, benefiting from increased government spending, strong productivity growth, and improved policy frameworks. Moreover, stability in commodity prices and the housing market, along with the injection of liquidity in the financial markets, should support the eventual recovery.
Domestic economy likely to follow suit :
In light of the worsening economic conditions in the advanced economies, we expect the domestic economic growth to decelerate in the next 4–5 quarters. In the current tight liquidity scenario, while Industrial sector growth has slowed down considerably as compared to the last year, we believe the slowdown will gradually spread to the Services sector, thereby resulting in the moderation of GDP growth to 7–7.5% for FY09 and around 6-6.5% for FY10.
However, in our view, the various fiscal and monetary measures taken by the government and the RBI, respectively, to prop up the economic growth can certainly lift the domestic demand and investment outlook for FY09 and FY10. As the money market liquidity is improving and inflation is steadily coming down, we anticipate interest rates to reduce, leading to increased demand for both corporate and retail credit. Besides, various fiscal measures for the Manufacturing and Infrastructure sectors should boost investments in the Industrial sector, creating a multiplier effect across the economy.
Moreover, we believe that once the current crisis eases and confidence returns to the global financial markets,the Indian economy will revive faster than most other economies due to its limited exposure to exports.Besides, the liquidity scenario is also expected to improve as FII inflows will likely revive the Indian equity markets.
However, valuations are attractive :
We believe that the current share prices already discount the events and scenario of the coming 9–12 months.This is the reason why the P/E multiple of the Sensex has recently fallen to 11x (the lowest since 2000), discounting the recession in the developed markets and the slowdown in the emerging countries, including India, for 2009. Consequently, we believe that the expected recovery in 2010 will start reflecting in the valuations in the next 3–6 months. This makes various stocks across the sectors very attractive value picks with a medium-to-long-term investment horizon.