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Tread cautiously in the markets - R L Narayanan

| 7/9/2011 5:45 PM Saturday

R L Narayanan
Vice President - Institutional Sales, Bonanza Portfolio


Though the Indian market is among the leaders in the emerging market pack, the current year is not good for the emerging markets. Redemptions from emerging market equity funds have exceeded USD 26 billion during the week ending March 26, 2011. A concern about high inflation and high interest rates is palpable in most markets and India is no exception.

On the earnings front, the numbers for Q4FY11 would bear the impact of rising costs and interest. Nevertheless, we see a 13-14 per cent growth in profits. The crude oil spike is a very big concern for the Indian economy as a whole. It not only affects inflation, but also the fiscal deficit. Therefore, if the government is able to successfully manage inflation, a fall in crude prices can be a positive trigger. At the same time, if crude rises above USD 120 per barrel and remains above USD 110 for a reasonable period of time, the economy will start struggling and it will be a rude shock for the economy and the market. 

Inflation is already too high. Policy-makers should be serious about the threat it poses, for inflation kills growth. In India the current expectation is that inflation will top out in the first quarter of FY11-12. In the current form, oil is likely to contribute to inflation build-up significantly if the tension in the Middle Eastern markets does not subside soon. Given the fact that state elections are coming up, the government may have limited leeway in raising fuel prices, thus placing OMC margins under pressure. Manufacturing could feel the heat as well given the rising material and interest costs.

Interest rates may go up with a higher cost of deposit and thus a higher base rate, but these are likely to peter out by the second quarter of the coming fiscal. A delay in rates coming down is bad as it might result in the private sector being crowded out. 

Demand pick-up is strong in Europe and the USA. Niggling worries regarding the EU members and their ability to honour commitments remain, though. Japan may inject a bout of uncertainty with its currency. The out look for global markets is positive. 

We are currently bullish on selective banks, pharma and FMCG stocks such as the Central Bank, ITC, HUL, Cipla, Ranbaxy, Strides Acrolab and Torrent Pharma. Our focus would be on pharma as companies that have managed to deliver on the earnings front. While the coming year may not see such a massive re-rating of the sector again, the strong earning potential of companies in this space offers adequate investment opportunities. Major growth triggers will be drugs going off patent and raising health cost in the west. What would be a loss for global pharma giants like Pfizer and GSK would be a major gain for Indian pharma companies. In 2011 alone, as per IMS Health, products having sales of more than USD 30 billion are estimated to go off patent. Another theme to watch in the year would be cash-rich MNCs trying to delist their Indian counterparts as most of the companies are debt-free and also have enough cash piled up. Companies like MphasiS, Esab India, SKF and Cummins are to be watched. 

As the markets have rallied back sharply from the lows of the year, invest cautiously as opportunities will always be there, though valuation and macro factors remain a concern. When the markets are rising retail investors should be careful about spiralling crude prices, interest costs and inflation, since all the four cannot rise simultaneously

 

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