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Invest Selectively & Systematically

| 7/12/2012 9:03 PM Thursday

Ajay Jaiswal
President – Investment Strategies
Microsec Capital










TIME TO INVEST

  • Past experience suggests that investments made at these valuations have yielded good returns. This is a time to get into the markets, and get into equities selectively.

FACTORS TO WATCH FOR

  • Going forward, there are multiple triggers that may drive the markets, including the reforms process, crude prices, the rise in power tariffs and FDI in retail, insurance and aviation.

There have been talks that the Indian markets are trading below their 10-year average. However, before saying that, one needs to understand why it is so. A series of negative news flows such as the Euro zone crisis, the slowdown in China and the US going back into recession have triggered an air of pessimism around the markets. The discouraging news flows on the domestic front, for example the policy paralysis, have also contributed to this sentiment.

However, the most important question is, where are the markets headed from here? We are clearly of the view that at 12-12.5x their forward earnings, the Indian markets are definitely not expensive to invest in. Past experience tells us that investments made at these valuations have yielded good returns. We are of the opinion that this is a time to get into the markets, and selectively advise a ‘buy’ on equities.

The earnings season will soon be upon us again. We think that the earnings downgrades have already bottomed out in the last quarter itself. So, the expected earnings are well reflected in the indices now. A deterioration of earnings from here on could be light, as we believe that the earnings as well as the sentiments are currently at a bottom. When the earnings as well as other economic indicators are at a bottom, the equity markets tend to bottom out as well. Hence, we do not expect any further earnings downgrades from these levels.

Of late, the inflationary scenario and interest rates have been two subjects that have been discussed a lot. I have a contrarian view on the inflationary scenario. This is the third year in which we are expecting inflation to be on the higher side. For the past 15 years, inflation has rarely been high for three years in a row. This is because the base effect comes into play. We can expect some rate cuts in the future, as the global central banks are slashing the rates, which is likely to instigate the RBI to follow suit.

Six months ago, we had predicted a dangerous fall in the rupee. However, the actual fall has exceeded our expectations. Our target was around Rs 54/USD, but the currency has breached the Rs 57/USD mark.

Going forward, there are multiple triggers that may drive the markets from these levels. First of all, the reforms process may start from now on. In fact, it has already begun, though people are not seeing it. For instance, the prices of petrol have been decontrolled. The other is the rise in tariffs for electricity companies. If these continue to go up, it may turn the clock for power companies. We may also see FDI in retail, insurance and aviation materialising. If crude remains around the USD 90-100 per barrel, it could be a very big trigger for the Indian markets.

For the last three years, we have not bet on a sectoral basis. We haven’t covered infrastructure, except for Larsen & Toubro. At present, though, we feel that this sector will outperform the indices. One company that we are betting upon is IL&FS Transportation. Banking is another sector that we are keen on. According to us, SBI and Andhra Bank will do well. LIC Housing Finance has always remained a favourite. On a stock-specific basis, Indian Hotels is our top pick and Blue Star is also a favourite. ITC, GSK Consumer, Godrej Industries, Max India, Tube Investments, Cummins India, Bata India, Pidilite Industries, Bosch and Exide Industries are some of the others that we favour.

We have been advising retail investors to invest in companies with sound corporate governance and strong managements. They should invest in a systematic manner and avoid being led by rumours. Any individual who is investing at this point with 13x forward earnings will definitely make money over the longer term.

 

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