Corporate performance is better than the economy’s performance
Corporate performance in fiscal 2011-12 in India has been better than the performance of the economy and this trend is likely to continue into fiscal 2012-13. The corporate sector has performed creditably in a difficult environment and this performance is not reflected in the markets as markets are grappling with a below par performance of the macro economy. Indian equities are down around 10% on a year on year basis and the negative equity performance reflects the rise in bond yields as well as the sharp depreciation in the Indian Rupee (INR) against the US Dollar (USD). (Table 1)
On the corporate side, there have been hits and misses but by and large the majors are still growing sales and making profits. Taking the Nifty private sector majors, ICICI bank and HDFC Bank have grown consolidated net profits for full year 2011-12 by over 25% and over 30% respectively. Infosys and TCS have grown profits by over 20% in 2011-12 though revenue guidance has been mixed with Infosys showing muted guidance while TCS has been more positive in its outlook. Reliance revenues have grown over 30% but its profit growth has been flat. However the company with a cash position of over Rs 70,000 crores is completely debt free as cash exceeds its total debt.
The Indian economy’s score card is not reading so well for fiscal 2011-12 with GDP growth down to 6.9% from 8.6% levels seen in 2010-11, fiscal deficit up by 1.3% from budgeted levels and Current Account deficit higher by 1%. The worry on policy paralysis in the government is lowering market sentiments despite corporates holding on well in an uncertain economy.
Markets will start recognising corporate strength in difficult economic conditions and will start looking at corporate fundamentals than economic fundamentals and this will lead equities higher this year.
US markets have already started factoring in good corporate performance though the economy grew at 2.2% in the first quarter of 2012 against expectations of 2.5% growth. Profits from Apple, Amazon, Microsoft and AT&T came in better than market expectations for the first quarter of 2012. Economic data in the US was mixed with retail sales for March 2012 coming in higher than expectations while job additions for March 2012 came in lower than expectations. The loose monetary policy maintained by the US Federal Reserve (Fed) is helping the economy as it is keeping interest rates down in the system.
China is fighting a property and loan bubble and this is keeping down its markets. Japan is fighting a strong Yen though recent increase in bond purchase limits by the Bank of Japan will help weaken the Yen. A weakening yen will help lift prospects for Japanese corporates.
German economy is holding firm amidst weakness in other Eurozone economies with unemployment at two decade lows and wages rising leading to increasing purchasing power in the hands of the Germans.
Commodities are reflecting economic weakness with oil and a broad basket of 19 commodities that is tracked in the Reuters CRB commodity index showing negative returns on a year on year basis. Lower commodity prices will help corporates do better and this should reflect in equity performance.