Adequate Diversification In Portfolio Required

The Indian markets are currently rising on expectations of better growth rates as well as lower interest rates. Currently they are trading at a marginal premium to the long-term average valuations, based on consensus earnings. While India’s valuations are higher than several other EMs, the growth rate of the Indian economy is also expected to be better than those markets, in turn justifying the higher valuations. The results for the second quarter, however, were a mixed bag. They clearly reflect that things have not changed much at the ground level even though the sentiment among corporates is positive. Further economic reforms and potentially lower interest rates would help re-start the capex cycle, we believe.

Inflation, both CPI and WPI, has moderated over the past few months. The fall in food inflation as well as in core inflation has helped in containing the overall inflation. The fall in crude prices has also helped in containing the same. This has strengthened the case for a rate cut by the RBI. However, a part of the inflation moderation is due to the base effect and the RBI wants to see a sustained low inflation rate. Another factor that influences inflation is the currency movement which again is influenced by events across the globe, most of which are unpredictable.

India’s merchandise exports have been lacklustre due to weakness in some parts of the world. Thus, India needs to support exports, as imports may also rise with the expected economic growth in India. On the other hand, the USD is strengthening, in line with the economic growth in the US. Any steep depreciation in the rupee will put pressure on inflation. Thus we expect the rupee to remain in a narrow band in the foreseeable future. Moreover, the RBI has to manage the inflationary expectations. Thus we believe that the RBI will moderate rates in the first quarter of the next year.

Therefore, going ahead the interest rate cuts by the RBI, reform initiatives by the government and the Union Budget in February 2015 will be the major domestic triggers for the market. On the other hand, the Indian markets will continue to be influenced by the global geo-political issues as well as growth rates in large economies like China, Japan and the EU. The US economy is back on the growth path. However, other major economies like China, Japan and the EU are slowing down or de-growing. We believe that there may not be further deterioration in these economies and they will be supported by the government / central bank’s actions. Thus, these markets may remain volatile till the time there is stability or growth is resumed in the respective economies.

In this situation we believe that investors should have adequate diversification in their portfolio. We like the domestic investment-led / cyclical stocks and expect them to do well, in line with the fiscal reforms. We would be overweight on these. However, after the run-up, we would be extremely selective and would look at stocks with credible managements and strong balance-sheets. On the other hand, several export-oriented stocks are expected to perform well because of improved growth prospects in the US. We would recommend exposure to selective stocks in sectors like IT and pharmaceuticals. For retail investor we suggest they should invest with a long-term perspective in stocks with credible managements and strong balance-sheets.