Nomura: Banks, Real Estate, Infra, Consumer Durables Should Get Thrashed

 -> 04TH May, 2011
Slowing Growth, Rising Inflation and Interest Rates, With falling momentum are negative tailwinds for the market, in a region generally accustomed to high growth rates with low PE multiples backed by sustained earnings growth. Clearly, there is no visibility in earnings as of now.

Investment cycle/capex

Strong government focus on rural development, salary hikes to government employees amidst high growth has

vastly expanded aggregate demand. Labour shortages are becoming a binding constraint on growth and risk

compressing margins of companies. We prefer consumer-facing, less labour-intensive companies with

pricing power. IT/BPO, mid-caps, construction and real estate companies are more vulnerable to labour

shortages.

Labour shortages

Macro outlook for earnings would be tough next year: wage pressures, rising commodity prices, elevated inflation,

tight liquidity, downward sticky interest rates, strong rupee, government expenditure in the backdrop of strong

domestic consumption and below-trend global economic growth. See downside risk to consensus-based

growth expectations of 20% for FY12F.

Earnings

See strong headwinds to inflation on rising global commodity prices. Labour shortages and rising wages could

exacerbate the wage-price spiral. Expect some tapering off in 1HCY11F on base effects. Market momentum at

risk amidst rising inflation. See downside risk to banks while metals would likely benefit from rising

commodity prices.

We expect  some disappointment in short to-medium term. See several obstacles to the capex cycle despite strength 

 in demand. With a few large sectors driving organised manufacturing capex, the investment outlook for these key 

capex-driving sectors remains muted next year. Meanwhile, the unorganised manufacturing sector suffers the 

 

most in an environment of very tight liquidity.