Markets In Consolidation Phase
9/6/2012 9:04 PM Thursday
ED & CEO
SEEKING ECONOMIC REFORMS
- The overall results for Q1FY13 suggest that it is important to look at company-specific results to take investment calls, as the equity market is a stock picker’s market and no secular trends are identifiable.
- The trigger for the Indian market going forward will be the economic reforms process, which could be launched post the monsoon session of Parliament.
The Indian market is currently in a consolidation phase. It is trading within a range (Nifty 4800-5500) due to a few macro-economic concerns like the higher twin deficits and a lower GDP growth trajectory. The recovery in the monsoon that happened in August is somewhat tempering fears of hyper-inflation and a consequent delay in the rate reversal cycle.
However, the macro-economic picture is not as healthy as one would like it to be. The government is failing in its attempt to push economic reforms and curtail the fiscal deficit. The concern on top of everybody’s mind is the lack of political consensus on the economic reforms process. India is staring at a possible downgrade by ratings agencies if the government is not able to get its act together quickly in terms of charting a road map for fiscal deficit control/management.
The aggregate sales for the 30 Sensex companies grew at around 17.6 per cent during Q1FY13 on a YoY basis. The PAT growth for these companies has been at around 15 per cent and the EPS was up 19.7 per cent YoY. These numbers suggest that the results have been quite healthy. However, when you look at the sales and earnings growth of a broader set of companies, it does not look so attractive. For the BSE 100 companies, sales growth in the first quarter has been around 16 per cent but the earnings growth is down by 1.5 per cent. It is therefore important to look at company-specific numbers to take investment calls. This reiterates my stance that the equity market is a stock picker’s market and no secular trends are identifiable.
The worry of hyper inflation with a vastly reduced farm output that existed in July 2012 is now behind us, with the situation not being as bad as one had thought. I think the inflation scenario should ease over the next three-four quarters and we should be in a much better situation by the last quarter of FY2013. The INR is likely to remain at its current level and continue its weakness unless economic reforms can be pushed, which in turn will increase the FII and FDI flow into the country. The CAD is likely to come down as gold imports have slowed and crude is 10 per cent lower YoY. This substantially takes pressure off the rupee. However, if the reforms agenda is pushed and the trajectory of FII and FDI flows goes further up, we could see the rupee sliding back towards the 52 level.
The trigger for the Indian market going forward will be the economic reforms process, which could be launched post the monsoon session of Parliament. The government has set up various committees in July-August 2012 to look into areas like GAAR, fiscal consolidation, business confidence, sectors like IT, power, civil aviation, education, hydrocarbon exploration, pharma, pensions, etc. The government is likely to announce major initiatives to boost investor sentiment and push exports to uplift the sagging economic mood. This could be the trigger that the markets are looking for.
With global growth remaining in the weak territory, it is difficult for the world markets to rally much from where we are today. The Dow is trading relatively strong, very far away from its 2008 low. In fact, it is only seven per cent away from its lifetime high. This does not augur well given the concerns on the US recovery being a fallacy. Almost all of the BRICS nations are stressed. The markets in China could recover if the Chinese were to instill a dose of stimulus. The world at large seems immune to repeated doses of steroids (read stimulus). The stocks we are currently betting on are value stocks with a good business cycle going for them. We are bullish on stocks like Andhra Sugars, Reliance Capital, Karur Vysya Bank and Tide Water Oil.
Investment in equities with the assistance of a sound equity advisor and with a long-term view is likely to yield handsome returns over the next few years, and every investor needs to have exposure to the equity markets. Short-term market gyrations and stress will offer investors a golden opportunity to get into fundamentally sound stocks at attractive entry points. Retail investors needs to be prepared for that with the help of their equity advisors.
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