10 Bear Argument: 5 gone, 5 to deal with

Nifty for the year gone by went down by 24.6%. Our market has been the worst performer amongst all emerging markets - just for comparison stock market in Indonesia went up by 3.2% this year.

This wave of bear onslaught in 2011 in India was riding on the back of 10bear arguments- EU debt crises, tepid global growth, high commodity prices globally, persistent high inflation domestically, rising interest rate, fall in value of Indian rupee, deteriorating macroeconomic condition, lack of industrial and infrastructural investment, policy paralysis and high level of relative valuation at the beginning of the year.

Out of these 10 bear arguments, now as we move in2012, 5 of these issues i.e: EU debt crisis, high commodity prices, high inflation, rising interest rate and high valuation level, no longer remain a valid argument.         

This means that fading away of any of the other 5 bear arguments will have a higher positive impact on our Markets and that makes us believe that 2012 will be a year of positive return. 

Looking back sectorally, Consumer staple is the only sector that gave positive return for the year primarily because of smart rally in ITC and HINDUNILEVER. We expect some more out-performance by these companies in 2012 particularly ITC as it does sourcing from rural farm sector and we believe that going forward agri prices will fall or at least will not rise. This hypothesis is primarily on the basis of falling farm output prices globally.

Consumer Discretionary fell by 23% this year even though its sub constituent Auto had positive run. Going forward we advise neutral on the Auto. Falling metal prices will help them but we are seriously worried about top-line growth of auto companies.

Coming to Healthcare sector, it has fallen by 14% this year. In this space though valuation no longer is attractive, we still favor SUNPHARMA among large players and DIVISLAB and IPCALAB among mid caps.

IT sector also out- performed NIFTY. In IT we favor large cap stocks like TCS and INFY in a tepid global growth environment. Though we believe some of the mid cap IT stocks like Hexaware, KPIT, Mindtree and Tech Mahindra may also do well on the back of depreciating rupee. Among small caps, we recommend security solution and product company MICROTECH.

Among sectors that have underperformed NIFTY this year are Utilities, Materials, Financials and Industrial. We suggest caution on materials and industrial. Materials as we do not see commodity prices rising anytime soon.  And for industrials though their top line has lost momentum due to macro issues but their valuation multiple has suffered in our view due to change in their business model-i.e now they have become asset heavy businesses.

As far as financials are concerned, these are leveraged bet on broad economic performance and one should accumulate well run banks at lower prices. We recommend buying ICICIBANK and DENABANK. Amongst utilities, we advise buying NTPC and POWERGRID around current prices.

Thank you and once again wish you a very happy and prosperous new year

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