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Watch Your Step But Keep Going

| 1/31/2011 9:53 AM Monday

-By HARAT SHETH
Director, Derivium Tradition Securities

The Indian market has historically received a premium valuation in the past as compared to our Asian peers since long. However, lately, a lot of issues such as rising inflation, interest rates getting harder, the current account deficit and liquidity crunch have played a deterrent role. I believe that the premium has already started fading and that global investors would like to take a wait-and-watch stand before parking their funds in India on a long-term basis.

At present, we are witnessing the third quarter results for India Inc coming out. As regards the third quarter results, some sectors have become quite a concern. Commodity inflation is heavy on the capital goods manufacturing companies like BHEL, L&T, etc. and also on consumer durable companies. Therefore some sectors where commodities form a large part of inputs, will definitely face some pres-sure. We feel the markets are expecting margin pressures across the board. As for the banking sector, there will be a lot of pressure on the NIM (Net Interest Margins) front going forward. Results for the third quarter of the present fiscal will remain a bit muted looking at the way stocks are hammered as of now.

Inflation remains a major concern for India at present. The inflation figure for December 2010 has come out at 8.43 per cent. I think we are a few months away before we witness peaking out on this front. On the interest rate front, we expect a hike of 75 basis points in the next six months or thereabout from the present repo levels which stand at 6.25 per cent.

On the Indian markets front, I think that the triggers for the markets going forward will be the government moving ahead with reforms which have been on the back burner for the last couple of months. We have started FY11 on a very good note with the blockbuster 3G auction and the largest IPO ever of Coal India hitting the markets. In 2011, I feel that the government has to take firm steps as far as urea and diesel decontrol and the roll-out of the GST are concerned. These reforms will play a pivotal role for bringing in some positive vibes for global investors. These reforms will provide a momentum to the markets going forward. If the Government moves ahead with the reforms in an aggressive way then investors will be back in the Indian markets.

At present, we are betting on certain themes like banking, which has been beaten down in the recent past. Although there will be some pressure on the margin front, private sector banks like ICICI Bank, HDFC Bank, IndusInd Bank and PSU banks like IDBI, BOI, Canara Bank, etc. may be good options. Consumption themes and the IT sector may invite inves-tors’ interest. In IT, TCS, KPIT and Subex may remain in the limelight. Retail investors panic with a fall and get euphoric with a rise therefore we suggest them to stay invested in the market as there are some headwinds at present which are likely to fade away with time. Retail investors should invest on a gradual basis in which case, the SIP looks to be the best option.This is the best way to play the India story according to me.

 

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