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Use Volatility As An Opportunity

| 1/10/2013 9:03 PM Thursday

Q3FY13 Corporate Earnings

On the financial front, we see a sequential improvement in earnings in Q3. We expect 10-12 per cent growth in adjusted PAT of Sensex companies in Q3 as compared to the single-digit growth seen in the past two quarters.

What To Expect

Going forward, we believe that volatility is to rule again this year. We expect bouts of risk aversion-driven corrections and liquidity-driven sharp rallies.

Gaurav Dua
Research Head
Sharekhan

Even after the Nifty’s recent run up to the 6000 level, the PE multiples are still marginally below the long-term average multiples of benchmark indices. Thus, the valuations are not cheap anymore, but are in no way stretched either.

India has got perhaps more than its fair share of foreign inflows into the emerging markets due to the recent policy assertiveness shown by the UPA government and also the expected monetary easing by the RBI. In fact, India would be among the few countries globally that would be cutting policy rates in 2013 (most countries have already cut policy rates in 2012) by close to 100 basis points in 2013. Thus, the premium valuation of India as compared to some of its peers is likely to sustain going ahead too.

On the financial front, we see a sequential improvement in earnings in Q3. We expect 10-12 per cent growth in adjusted PAT of Sensex companies in Q3 as compared to the single-digit growth seen in the past two quarters. However, the revenue growth momentum is losing steam and the pressure on the margins is likely to continue on the broader level.

As regards inflation, we believe that it is likely to moderate in the coming months. However, the policy actions (especially steps to curtail fiscal slippage and consequently market borrowing by the government) would strongly influence inflationary expectations in the near future. On the interest rates, we expect the RBI to reduce policy rates by 75-100 basis points in 2013 and also carry out open market operations to address the short-term liquidity issues. Thus, the interest rate environment is likely to remain benign, with the yield on 10-year paper hovering around 7-7-7.8 per cent range for a large part of the year.

The unexpected news of the US Fed Reserve curtailing quantitative easing in 2013 could result in the strengthening of the US dollar, as this would be seen as a step to curb the fiscal situation in USA. The uncertainty in the Euro zone and Japan could provide a further boost to US dollar and put pressure on all major currencies globally.

Going forward, we believe that volatility is to rule again this year. We expect bouts of risk aversion-driven corrections and liquidity-driven sharp rallies. We do not expect a clear uptrend, though the returns in emerging markets are likely to be positive this year too.

At this juncture, the themes to play in 2013 would be largely on economic recovery driven consumer discretionary sectors (like media, real estate, NBFCs) and stock-specific balance sheet restructuring stories. Those who have completely missed out on the rally can look at investing systematically (in a gradual manner) and use volatility as an opportunity to enter scrips at attractive levels. In addition to this, we believe that the equity markets do provide attractive stock-specific investment opportunities and it is never too late.

Important Influencing Factors For Equity Markets In 2013

SupportiveNegative
End of super cycle in crude oil reduces subsidy burden and pressure on trade deficit. Spending cuts in USA results in the economy slipping back into recession.
Low growth in developed markets to keep liquidity taps flowing. India getting fair share of flows of those coming into emerging markets. Contagion effect in Europe resulting in another bout of risk aversion.
RBI to cut policy rates by close to 100 basis points in 2013. Trade deficit to remain high due to slowing exports to put pressure on the INR.
Government committed to push reforms forward, with direct cash transfers potentially turning out to be a game changer. A possible risk of dishing out a populist budget (FY2013-14) before the state elections and general elections in 2014.
Corporate earnings revert back to a higher growth trajectory (12-14 per cent), up from the tepid growth of close to 7-8 per cent CAGR in the past four years. A possible early general election in case the Congress party is unable to manage its supporting partners.


 

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