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12 factors that have potential to impact your equity portfolio in 2012
January, 02nd 2012

Several policy related issues may be resolved in the new year. These and macroeconomic factors such as results of state elections, eurozone troubles, and shortage of coal will have a glaring impact on investor sentiment. ET Intelligence Group lists 12 factors that have the potential to impact the performance of your equity portfolio in 2012

Coal Shortage

Coal remains one of the most critical commodities for the Indian economy as it contributes more than 70% to the country's power generation . The power sector has underperformed the broader market in the past one year as power utilities are grappling with coal supply shortage. The domestic supply of coal from Coal India, the world's largest coal producer, is impacted due to land acquisition, environmental and logistical issues. As a result, the dependence of India Inc on expensive international coal is increasing. Coal demand from 2007-2012 has increased 7.3%, but the production has risen only 5.4%. By the end of 2017, this shortfall is expected to be 200-300 million tonne, which is huge and can have adverse impact especially on power utilities. The government's efforts on increasing coal production of Coal India and how it is able to handle land acquisition and environment issues will be critical.

Commodities

Gold prices may continue to rise if central banks in Europe and the US continue to use monetary easing tools they used in 2011 to buffer economic growth in their countries in 2012 as well. However, the supply of money in the global economy will determine the rise in prices of gold. If the supply of money increases, commodities, as an asset class, will also rally despite concerns of a global slowdown in demand. A rise in iron ore prices will benefit Sesa Goa and NMDC. However, this will hurt margins of steel-making companies.

Euro Zone Debt Crisis

Concerns of sovereign defaults in the Euro Zone are far from resolved. And as leaders struggle to reach a consensus, the global economy will continue to suffer . For India, this means that exports to the region will take a hit as demand weakens. More importantly , the value of the local currency is likely to fall further as investment fund flows are not expected to improve. This will make key imports such as oil and coal more expensive. Also, there are 25 companies whose foreign currency borrowings will have be to be paid back in 2012. The prominent ones include Reliance Communications, Tata Motors, Tata Steel, Jaiprakash Associates and JSW Steel.

FDI in Retail & Aviation

The retail sector has been a laggard for quite sometime now. The sector today faces challenges such as high rentals, space availability , back-end infrastructure, high employee cost and high working capital for inventory management. This necessitates very high capital but expanding by leveraging can be risky, lessons from the past tell us. Therefore, the huge size of the required capital can be only infused by strategic foreign partners, who will not only bring in the capital but also the know-how .

If FDI in retail is approved, the overall sector will get a higher rating. Aviation companies too face a similar situation. All companies in this sector are grappling with volatile fuel prices and demand. Foreign direct investment (FDI) in aviation can prove to be a boon as these companies are heavily burdened by debt, with a huge chunk of their income going towards servicing debt. Foreign investments will help these companies bring down debt and use the cash for operational and investment purposes.

GST & DTC

The Goods and Services Tax, or GST, and the Direct Tax Code, or DTC, are progressive initiatives aimed at ensuring a simpler and uniform tax regime, covering both direct and indirect tax. GST will replace other forms of existing indirect taxes for all goods and services. The implementation of this is expected to bring more clarity to the supply chain management of manufacturing companies, thereby rationalising expenses on logistics. The major objectives of DTC are to increase the current tax base, reduce tax exemptions, and to rationalise tax rates. Corporates are expected to face a lower tax liability of up to 10%, which should support their net profitability. Both GST and DTC are likely to improve tax collections thereby boosting the exchequer. This will help in sustaining the country's long-term GDP growth.

Geo-political Tensions

Geo-political tensions have become an ever-growing important factor in global economics in recent years - particularly due to its impact on crude oil prices. The 'Arab Spring' in the initial months of 2011, which saw political upheaval in several countries in the Middle East and North Africa (MENA), took oil prices above $100 per barrel. Even towards the end of 2011, when the problems in MENA mostly subdued - particularly those in Libya - oil prices refused to ease in spite of concerns over European sovereign debt crisis. The reason
was International Atomic Energy Agency's report expressing serious concerns over Iran's nuclear programme and the subsequent sanctions by the US, the UK and Canada.

The US recently asked UN Security Council to impose the strictest sanctions against the country. Today Iran is world's fifth-largest oil exporter and produces more than twice the Libya's output before it shut down. Iran also controls the strategically important Strait of Hormuz through which nearly 40% of the world's oil travels. If Iran chooses to use oil as a weapon to retaliate growing economic sanctions against it, oil prices could skyrocket. Other factors include possible sanctions on Syria, succession and the risk of strife in Saudi Arabia, elections in Venezuela and Angola and ongoing violence in Nigeria. In the current weak economic conditions, a sudden spurt in oil prices would mean a severe and long global recession. India with its large fiscal deficit and growing current account deficit will suffer the most in such conditions.

 
 
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