Look Close, Not Far

- By DIPEN SHAH
Head - PCG Research
Kotak Securities

After witnessing the slide of 10-12 per cent year till date due to certain macro-economic issues such as inflation, increasing interest rate and higher commodity prices, we feel that the Indian markets now exhibit the potential to move up in the second half of the calendar year. This is based on the optimism that the government spending and the reforms process will start in the next few months and also on the assumption that no major negative developments will occur internationally, even though what happened in Japan continues to have an impact on the markets.

With the prospects of high growth and a moderation in inflation, we think India would be able to outperform other emerging markets in the medium to long term. The key point to consider from the stock market point of view is the forthcoming Q4FY11 results. This will be an important benchmark, since the results will reflect whether the raw material cost impact on the margins has increased or not. Similarly, higher interest costs may be a feature of the results. However, the most important factor will be revenue growth, especially for the domestically focused companies.

We expect the raw material cost impact to continue into the fourth quarter too. Additionally, what one would have to look out for in the immediate term is the RBI credit policy and how the forthcoming monsoon fares. Needless to say, international events will also play a significant role in determining the future course of the equity markets. The action on reforms will be another decisive element in the swing of the markets.

The fiscal deficit target for the next year is not very high and that too needs to be taken into consideration. Therefore, the interest rates, after remaining high in the near term, should become moderate in the long term. Meanwhile, inflation is likely to be moderate over the next two months, though the absolute price levels may not come down immediately. In terms of sectoral impact, the users of primary agricultural commodities will continue to experience pressure on margins. Metals and crude prices are largely international factors and are very volatile. We expect the prices of metals to remain high and this may have an impact on the user industries.

Crude prices currently carry a risk premium that depends on geopolitical issues. In our opinion, the prices may cool off from the current levels in the medium term. Given this scenario, our preference is for capital goods, banking, IT, media and metals. The reason for this can be attributed to the strong demand scenario that is panning out for IT. The media sector is going to perform on the back of strong consumption demand with higher ad spends. Subscription revenues are also expected to rise gradually and a revival in global economy may keep the metal prices buoyant.

So what must a retail investor do in such a volatile situation? Our suggestion is that you should have a long-term view and play the game with patience. It is difficult to predict the markets amid so many uncertainties and hence the best strategy is to look at individual stocks which are well-man-aged, select companies with good business models and choose scrips available at reasonable valuations.