Go slow and steady

K K Mittal
Head - PMS, Globe Capital

In the last three months the Indian stock market indices have fallen by 13 per cent from their peak in November 2010 due to sustained selling from foreign investors and the lack of large domestic investors. The foreign investor selling has come at the back of rising crude oil prices, sustained higher inflation, and in a rising interest rate scenario. Recently, the US outlook has improved as supported by various economic indicators which in turn have resulted in the movement of some funds from the emerging markets to the developed markets. In a rising commodity prices scenario, FIIs prefer commodity-producing nations rather than India which is a net importer and hence the fund flow position has not been favorable.

We expect some short-term triggers to come from the upcoming budget where the key issues expected to be addressed include FRBM, labour reforms, mining reforms, and a tweaking of the taxation policy. We expect greater focus towards boosting foreign direct investment in our country which has recently been stalled due to the ambiguity over clearances and political bureaucracy. Further, some strict measures to control/avoid scams and corruption can also be expected. The government’s measures to tame inflation have not met with any success so far. Any measures to improve the supplies rather than addressing the same through just a monetary policy will also be keenly watched.

We believe that the real consumption story from the emerging middle-class may remain intact. We also believe that the rural consumption story has further strengthened due to the rising crop prices and the numerous government schemes like NREGA and rural infrastructure spending. Farmers are becoming increasingly entrepreneurial, backed by the ease of avail-ability of finance which is opening up numerous opportunities to diversify into ancillary industries, thereby giving an impetus to high value-added consumption.

Thus the consumption theme at the rural and middle-class level may remain intact with the demand coming in for two-wheelers and FMCGs among others. Given the smooth recovery in the US, IT services and the healthcare and pharma sector remain attractive bets. Further, with the recovery of the world economy the commodity prices are expected to remain strong which makes integrated players in the metal segment a good investment bet. In spite of the geo-political tensions in Egypt and the rising crude oil prices which in turn fuel domestic inflation and worsen the current deficit, we feel that the correction has been overdone and the markets are trading at 14x FY12E earnings, much below the historical average.

Moreover, given the growth prospects with the consensus estimates for GDP growth in FY12 ranging from 7.5-8.5 per cent, we feel that India is a market which cannot be ignored by the investors. This decline can be used to buy selectively in good quality companies both in the large-cap and the mid-cap segments. Our advice to retail investors is to avoid investing lump sum amounts as the market is volatile and instead invest in a systematic manner over the next few months.