Watch your step in the markets

By - R SREESANKAR
Sr Vice President & Head – Institutional Equity
Tata Securities

The present environment in the Indian market is challenging. The inflation rate is likely to hover on a higher scale and this may get escalated further as fuel prices have started rising thanks, unfortunately, to a hike of Rs 5 in the petrol prices already in effect. This may soon be followed up by a rise in diesel prices as the government may go ahead with a price hike in the near future. We may witness a slowdown in a lot of capital expenditure by many companies as higher inflation has resulted in a higher interest rate scenario. Going forward a downgrade in the GDP data by many analysts cannot be ruled out. The markets may witness growth but the growth factors that are factored in may have to be downplayed.

At present we are going through the results season wherein the Q4FY11 and FY11 results are being announced. Till date the results have been on expected lines. The banking sector has been characterized by higher pro-visioning for pension liabilities. The incremental slippages on loans are also on expected lines and there have been no unpleasant surprises. The real surprise on the earnings front has come from the cement sector. I think the cement sector has posted better than expected results thanks to the manufacturers’ ability to control prices to a great extent. As mentioned earlier, as far as the other sectors like IT, FMCG or capital goods are concerned, there were no jolts or shakes and the results followed the presumed track.

Coming back to the markets, we need to look forward for the triggers that can act as catalysts for a north-bound movement in the market. We feel that the main trigger could be the taming down of inflation. If inflation comes down, the Reserve Bank of India will probably not hike rates further and we may also witness a drop in the interest rates. The dropping of the interest rates will again result in a higher capex by companies which will drive growth in the markets going forward. This will be a positive for the capital goods industry. This could also be a good surprise package that may prove to be a very large driver for the markets.

Another impact that cannot be ruled out is the monsoon season. A normal spell of rains could play a soothing effect on the bearish sentiments and will in turn act as a trigger for the markets going forward. On the global front, the US markets are trading at their highs. One thing that we must focus on is about the direction that global growth has now taken. If global growth remains robust then we may import inflation. We have seen quantitative easing taking place in the US. One needs to watch closely how the US grows in the near future. The same is the case with Europe. We also have to keep a close watch on how the European economies are faring.

Coming to the Indian markets again, we are currently betting on the banking sector which is becoming attractive because, as mentioned above, we have seen that the incremental slip-pages as compared to their outstanding loans are not that high. The other sectors about which we remain bullish are consumption-related ones such as FMCG. At present our suggestion to investors is to be cautious in the short term as there are lots of headwinds that we are facing. However, at the same time I am also very much bullish about the longer term. One should invest with a long-term horizon.