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2015 Recap- 2016 Precap

Share Written By
Mr. Krishna Kumar Karwa

Managing Director & CFO

01 Jan 2016

Year 2015 turned out to be a complicated year for investors with corporate performance failing markets expectation. The reality surprised the exuberant expectations of rebound in earnings from a pro-reform government voted to power in 2014 and the windfall from crashing crude oil prices. Fuelled by these expectations, the phenomenal support from FII flows into equities continued to buoy the market with the benchmark indices ramping up nearly 50% till their peaks in early 2015.

 However, the momentum started to fade after the announcement of the budget in Feb 2015; actual earnings trajectory turned out to be flat or negative, contrasting the 18-20% projected by consensus estimates.  As a result the benchmark indices corrected 13-15% from their peaks in 2015 as FII flows turned negative and as concerns on global liquidity emerged in the run-up the eventual fed rate lift-off in Dec’15 after nearly 7 years of zero interest rate regime.

 Domestic politics have also eluded market expectations as the dilution of political equity of the Modi government compounded following the state electoral results in Delhi and Bihar. The declining political strength implied that the critical bills like Land Acquisition Amendment Bill and GST Bill failed the parliamentary approval. This dented the market sentiment notwithstanding other reform measures initiated by the government. Overall, cyclical bets that became the hallmark for the rally since early 2014 continued to unwind in 2015. But apart from the cyclicals, in the fag end of 2015 even quality stocks took severe beating due to prolonged state of overvaluation.

 The silver lining for 2015 however, was the continued flows received by domestic institutions, particularly mutual funds, from retail participants who saw great opportunity in exploiting the valuation arbitrage created from the earlier run-up in the benchmark indices and large cap stocks. Hence, mid-cap and small cap funds (and also stocks) saw phenomenal participation from retail investors, which has continued throughout 2015. Clearly, the dichotomous flows of FIIs and DIIs also reflect in inverse valuation trends reflected in the declining multiples for benchmark indices on one hand and rising valuations in the midcap & small cap indices on the other.

 In year 2016, equity market performance will be driven more by real performance rather than by expectations like the premium attributed earlier to global excess liquidity, political strength of the government at the centre or any other major trigger. In the most likely scenario, earnings growth may still remain modest in 2016, but better than 2015. This improvement in our view will be driven mainly by three factors a) higher government spending which will support demand specially in the urban areas and road infrastructure, b) currency depreciation and c) moderate improvement in growths in US and Europe.  With 10 state elections lined up in the next 24 months, political developments can also have bearings on market sentiment in the short term. Based on all these factors we do not expect market to see any major rerating in the near term. However, there will be abundant opportunity for bottom up stock picking.