India's story - Emerging market, domestic growth
8/15/2011 4:42 PM Monday
In the coming decade, due to its favorable demographics, India’s rising per capita income and consumption boom is likely to make the country a superior investment opportunity, compared to other emerging markets. India is somewhat safeguarded from external shocks due to its inward driven growth story fuelled by domestic consumption and investments in infrastructure, compared to other emerging economies driven mainly by exports. While this is true, the increasing correlation with the global economy is also indisputable. Thus, the recent Euro zone crisis and other global macroeconomic events continue to haunt the Indian equity markets.
The Q1 results have, so far, been a mixed bag. The pressure on margins due to increase in input prices, wages and interest rates, was evident from the quarterly earnings. How the monsoon pans out in the coming months will be crucial in shaping inflationary expectations.
As yet, the monsoon has been making headway on expected lines. Early signs of the impact of monetary tightening are visible in a slowdown in key sectors like auto, consumer durables and real estate. We can also deduce that the end of the monetary tightening cycle is near, as inflation gradually subsides. Having said that, we believe that the RBI is likely to increase policy rate by 25 bps in the next policy setting meeting. Fiscal worries, however, continue.
The mounting subsidy bill and revenue shortfall, along with impending divestments, could lead to the GDP growth rates chipping off a bit.
Though the WPI is likely to witness further uptick next month on the back of increase in fuel prices, a fall in global commodity prices will help in comforting nerves about inflationary expectations. In terms of its impact on economic sectors, the slowdown is clearly evident in auto and home loan disbursement. A high-interest rate scenario will not last long. We foresee banks’ margins reducing in the second quarter results too, as loans for longer duration projects are not materialising, and the ability to pass on the higher rates have started haunting the banks.
We don’t anticipate great expansion plans in the second quarter of the current fiscal, but if the monsoon is normal, prices of essential commodities might come down, helping to curtail inflation. However, credit growth in the banking sector will remain at RBI’s projected rate, plus or minus one per cent.
The Euro zone issues and worries on the US front would draw liquidity out of the equity markets to safer bets. This is already evident in the way precious metals have zoomed up. The longerterm beneficiaries would be emerging markets, especially India, which would show a relatively better growth based on internal consumption. Once risk aversion abates, global liquidity will find its way into the markets, which can give it relatively better returns. The gap between these two zones could be a painful period for equity markets.
Consumption-driven sectors remain our favorites, even as the valuation of some of the companies has touched the roof. Apart from this, we are positive on banking and infrastructure stocks, as we expect interest rates to soften in 5-6 months.
Considering the prevailing volatility in the markets, retail investors should invest in a staggered manner over a period of time. The near-term concerns about the global macro-economic scenario, high commodity prices, inflation in Asian economies and the unearthing of local scams continue to emanate. Despite this, the overall structural growth story of India still remains intact, which will attract liquidity.
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