Market Moves - Cyclical movement likely

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From a low of 5200 levels in Nifty our markets have rallied 10-15 per cent over the past three months mainly on the back of buying by the FIIs. At this point the market has already discounted the FY12 earnings and we may see some cyclical movement in the market in the coming two to three quarters.

Rising commodity and crude oil prices are likely to take some toll on the markets and we believe that the scenario could improve only in the second half of FY12 when the markets will start discounting the FY13 numbers. By then inflation is also likely to be reined in, which will result in an expected growth of 18 to 19 per cent in earnings for FY13.

Looking at these factors, there will be an expansion in the P/E band and probably at that point of time the markets may witness a 15 to 20 per cent rise.

FY12 earnings are likely to witness a growth of only 14 to 15 per cent on account of high interest rates, but the positive part is that in spite of a high interest rate scenario, we are quite immune to interest rate cycles given the fact that in India our credit to GDP ratio stands at about 35 per cent as compared to more than 100 per cent in the developed countries. But even in this high interest rate scenario we are still growing at eight to nine per cent, which is a positive indication.

FY11 has ended on a positive note where we have seen an earnings growth of 19 per cent. Most of the companies have witnessed better results, but there are a few sectors like infrastructure, cement and real estate which have lagged. However, companies in the automobile sector have shown resilience and have been able to post better results even in a high interest rate scenario.

Banking has once again done well. Margins have been maintained at 19 per cent levels and we hope to see the same trend going forward in FY12 too We think at present the markets are fully discounted and are looking forward to the monsoon as the next trigger.

The other trigger that the markets may look forward to is foreign fund flow to Indian markets. We have seen that there is an improvement in the overall scenario of the developed markets, which, in turn, will increase the savings rate in that region and, in turn, may see increased allocation to emerging markets like India.

At present we are bullish on the banking sector which will be in the forefront because of the high deposit growth rate, which stands at 20 per cent. A GDP growth of eight to nine per cent will help the industry to perform in a better way. We feel that the industry is a seller’s market and even if new licences are issued, it will not affect the growth rate of the sector. The other sector that we like is pharmaceuticals.

With significant amount of drugs going off patent we feel that Indian drug-makers are all geared up to cash in on this situation. We are maintaining a bullish stance on the sector.

Since we are expecting interest rates and inflation to peak out, we may witness a change of fortunes in the interest-sensitive industries like infrastructure and real estate. We are of the opinion that market cycles are always ahead of business cycles. One should  not wait for the recovery to be reflected in papers as at that time it will be too late and you need to get a sense of it and act at a faster pace. We like infrastructure a lot.

As for the software sector, it may underperform for some time as they are trading at rich valuations and are underweight in this sector. The Indian markets are not cheap and at the same time they are not very expensive looking at the growth rate.

Our advice to retail investors will be to adopt the SIP route to invest in the market to average out the P/E band.