How did markets fare in 2012? Dheer Kothari

dheerdaDecember 17, 2012

As 2012 draws to a close, it would be useful to analyse what moved the markets during the year and which sectors performed better than the rest. More importantly, what lies in store in the forthcoming year as far as market direction is concerned?

Interestingly, in the current year markets have bounced back and is likely to end with gains of around 25 per cent from last year’s closing levels of the Sensex which was at 15455 on the last trading session of 2011 assuming that the current level of 19317 is maintained by close of 2012. The markets had actually fallen by about 25 per cent in 2011 as the Sensex fell from 20509 at the end of 2010 to 15455 in December 2011.

The current year, in a way, was largely one of consolidation with the benchmark Sensex hovering around the 17,500 mark for long periods of time as companies grappled with high inflation and slowing economic growth. The Indian rupee exhibited signs of weakness as external trade became vulnerable to the sagging economies of Europe and the US where investor confidence was very low as a result of high unemployment rates and rising sovereign debt levels. As a result, our economy suffered from twin blows of rising fiscal and trade deficits which prompted S & P and Moody’s in particular to issue warnings of downgrade of our sovereign rating to junk status.

Fortunately, the appointment of P Chidambaram as finance minister after a Cabinet reshuffle and bold measures announced by him in consultation with PM Manmohan Singh set the tone for a healthy revival of investor confidence. The government announced drastic measures to reduce fuel subsidies in mid-September along with liberalization of foreign direct investment (FDI) in retail, aviation and broadcasting sectors of the economy.

Sentiment in the capital markets improved as Chidambaram made it clear that he was for stable and transparent tax laws. He announced that GAAR (general anti-avoidance rules) provisions would be reviewed with a view to resolve all pending disputes related to retrospective implementation of tax provisions which had actually ‘scared’ foreign investors when they resorted to aggressive selling in May this year taking the Sensex to sub 16,000 level.

The gains recorded by sectoral indices over a year to December 14, shows that banks, FMCG and consumer durables were the top performers in 2012 and the IT stocks underperformed. The BSE Bankex rose by nearly 47 per cent to 14265; BSE FMCG was up 48 per cent at 5976; BSE Consumer Durables was up 46 per cent at 7766; BSE Realty rose by 38 per cent to 2067; BSE Auto index recorded a rise of nearly 37 per cent to its current level of 11162; BSE Healthcare was up 35 per cent at 7982 and BSE Capital Goods was up by 24 per cent to 10948. The BSE IT index was the worst performer with a loss of 3 per cent at 5590.

As RBI reduces interest rates to stimulate fresh investments and overall economic growth, next year promises to be a better year for the markets overall. According to a Reuters poll, the markets are expected to steadily rise next year based on “expected interest rate cuts and the government’s resolve to press on with reforms.” If the markets move up as predicted by analysts, the benchmark Sensex will in all probability create a new high to surpass the previous best of 21,207 set in January 2008.