Pick Stocks From Battered Sectors

Kishor P Ostwal 
CMD, CNI Research

• INFLATION SCENARIO - The inflation scenario in the country is completely dependent on government polices whereas delivery marking is permitted through physical settlements which had been manipulated by speculators for hoarding and price rigging. The RBI’s efforts to control inflation, even at the cost of growth, through monetary measures instead of conventional supply economy are commendable and have shown some results.
• GLOBAL MARKETS TAKING OFF - The global markets are at a new high due to excessive liquidity and continued rate cut policy. There is still a five per cent upside in Dow which is driving all other global markets. The fall in gold prices has also had an impact on the global markets. The yellow metal may fall below Rs 23000 and a reshuffling of assets class from gold to equity might take place.

India cannot be compared with other emerging markets when it comes to market practices. Other markets have some standard set of capital market practices which are compatible with global standards whereas India lacks such a mechanism which results in the Indian market being controlled by a few minds including some FIIs. For instance, the Nifty fell from 6100 to 5480 in March 2013 even as emerging markets were making new highs every day. 

The current scenario is quite bad and scary although we are very close to making a new high. This is because retail investors have never participated in rallies. For record sake, however, we can always say that we are close to making a new high even if nothing spectacular is in sight at the moment, be it inflation, rate scenario, manufacturing, or the currency positions of the fiscal deficit issue. One must note that the Rajiv Gandhi scheme for investors (RGESS) could muster only Rs 34 crore in 2013, which suggests the negative sentiment of retail investors. There are 1400 companies suspended in which an amount of Rs 1 lakh crore is stuck and the promoters are still enjoying a backdoor de-listing through suspension. There cannot be a worse situation than this one, which fails to justify the return of investors to the capital market. 

Irrespective of the economy and its deteriorating fundamentals, corporate India has done reasonably well in Q4FY13. The earnings growth was better than expected given the low base of FY12. Pharma and FMCG have done well in the quarter. Investors should now look at battered sectors such as metal and banking which can benefit from the recent rate cuts. The IT sector is currently under pressure.
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The inflation scenario in the country is completely dependent on government polices whereas delivery marking is permitted through physical settlements which had been manipulated by speculators for hoarding and price rigging. The RBI’s efforts to control inflation, even at the cost of growth, through monetary measures instead of conventional supply economy are commendable and have shown some results. In my opinion, the real inflation situation is still bad and this is reflected in the sustenance of high bank rates at 15 to 18 per cent. If the government tries to work on supply economy, the inflation can cool off to four per cent or below quite soon. However, it will remain between five to six per cent for some more time.

Interest rates completely depend on inflation. The RBI may cut 50 basis points in the next 12 months as the stress point could be the reversal in growth before the general elections 2014. In fact, a CRR cut alone can make bankers cut rates.

FII inflow was huge in 2012 and has continued to be so in 2013. It is surprising that the INR is holding the 54 level in spite of such a huge inflow. The INR might get into trouble in case of a flight of capital. It should trade between 52 and 55 for another six months by measured control through currency exchanges.

The Congress recently won the Karnataka assembly elections. However, this alone may not help them to announce early elections. A major trigger for the market now will be the announcement of the general elections 2014. 

The global markets are at a new high due to excessive liquidity and continued rate cut policy. There is still a five per cent upside in Dow which is driving all other global markets. The fall in gold prices has also had an impact on the global markets. The yellow metal may fall below Rs 23000 and a reshuffling of assets class from gold to equity might take place. 

Metals, private banking, Oil and Gas and power sector look positive to me as of now, while auto and domestic consumption look weak. The pharma and telecom sector seem neutral. 

I would advise retail investors to indulge in a good research and pick stocks in the battered sectors. A structural bull run may start soon providing investors with multi baggers to follow some methodology. Lastly, the new mechanism for illiquid stocks needs reconsideration. These are the stocks where retail investors are already stuck leading to a point of no return.