Opportunity In The Guise Of Adversity

• The Road Ahead - 2013 will be a challenging year for the global markets. With the US Presidential elections out of the way, there is a clear vision for the next four years. The same cannot be said for Europe though.
• Domestic Stimuli - The domestic triggers are actually in the hands of the policy makers. Whether spending wins or deficit control remains central will guide institutional investors in the months ahead.

Advises - Sonam H. Udasi (Head – Research IDBI Capital)

India is currently facing headwinds, both domestic as well as global. There are concerns on how the European crisis will pan out and how a slowing China will affect growth. At home, India is facing the twin challenges of high inflation and lower growth. With a high fiscal deficit, the policy focus is on raising revenues and controlling expenditure. Raising revenues is proving to be easier said than done. The disappointing response to the spectrum sale and sluggish pace of divestment so far are adding to the headwinds.

If we talk about the financial numbers of India Inc. in the quarter gone by, there was marginal overall out-performance versus expectations. Of course, this was because the expectations were muted. The PSU banking numbers have been disappointing, while the results of Pharma, IT and FMCG companies were largely in line with or above the estimates. The full year earnings expectations for the benchmark Sensex and Nifty continues to be in range of seven to nine per cent and is largely unchanged. The Auto sector, especially two-wheeler, has remained under pressure. In IT, the volume growth remains a cause of concern.

High inflation has remained a concern on the domestic front. The Deputy Governor of the RBI has recently stated that inflation remains a cause of concern and until it heads south, the bank will not be able to tweak the interest rates meaningfully. While the RBI may be thinking of cutting the interest rates, the process may be slow. The thing is that a 25 or 50 basis point cut in interest rates is unlikely to matter that much and kick start growth. On the question of whether the interest rates have peaked or not, we can certainly say that they have. People may hold differing views on the timing and quantum of interest rate cuts by the RBI, but everyone will agree that in a year from now, the rates will be lower than where they are today. On the currency front, we feel that in the next year, the rupee will continue to remain subdued and will be in the range of Rs 54-56 per USD.

Coming to the global scenario, we think that 2013 will be a challenging year for the global markets. However, the US markets will fare better than their global peers. The data coming out from that geography is encouraging. The unemployment rate is steady and realty prices have started recovering. With the US Presidential elections out of the way, there is a clear vision for the next four years. The same cannot be said for Europe though. Germany will face elections in the next year. The EU leaders are constantly at loggerheads with each other, and we see that the Greek bailout is not without fissures. In China, it is expected that the rate of growth will be much lesser that what it clocked in the last decade. These are challenge points for the global markets, which underline the risk element still out there.

So, what can provide a solid trigger to the markets in this risk-dotted environment? In my view, these challenges provide an opportunity in the guise of adversity. Whenever we have faced pressures, extraordinary reformist measures have been taken and the markets have slowly but surely reacted positively. We have seen that in the last three months. The triggers are actually in the hands of the policy makers. The ongoing winter session as well as the upcoming budget will be watched closely. Whether spending wins or deficit control remains central will guide institutional investors in the months ahead.

We are currently overweight on sectors like media because of the digitisation drive that is happening across the country. We are also starting to get overweight on PSU banks. We know that the rates will be lower than what they are today, and therefore should give PSU banks some cushion against provisioning for stress assets. The valuations of this pocket are reasonable with a two-year view.

We advise investors to maintain a cautious approach and invest with a two-three year view. The situation is going to be increasingly volatile going ahead. So, if you do not have a medium to long-term view, it will prove difficult to adjust to market volatility.