Be An Investor Rather Than A Trader

G Chokkalingam
ED & CIO
Centrum Wealth Management

• Easing Interest Rates
  We believe that another 75 bps cut would take place by the end of 2013. However, if India receives a normal rainfall and the crude oil prices moderate significantly, we could see as much as a 125 bps cut in the repo rate by the year end.
  
  
• Upcoming Triggers
  A favourable Budget, significant FDI inflows into aviation & retail sectors, and a forthcoming monsoon performance, would provide further triggers to the market till October-November 2013.

Talking of the Indian markets, we believe that going forward, the markets would provide a limited upside opportunity of about 15 per cent in 2013, assuming a market PE multiple of 14x on an FY2015E Sensex EPS of Rs 1670. We expect the Sensex to touch about 23500 before the end of this calendar year. This expected return would be in tandem with other emerging markets as the global GDP is expected to slow down significantly this year, which in turn would limit the upside for the entire emerging markets.

We are presently in the midst of the earnings season. We believe that while the earnings of Sensex/Nifty companies are expected to go up by about 10 per cent on a YoY basis, the entire corporate sector is expected to post over 20 per cent YoY growth in its net profit. Companies from sectors like Private Banks, FMCG, Pharma and Tyre are expected to post a much better earnings growth as compared to the average performance of the Indian corporates.

On the inflationary front, we expect the WPI inflation rate to fall by around 6.5 per cent by the end of this calendar year, assuming that the forthcoming southwest monsoon would be normal. In our view, the possibility of reaching a five per cent headline inflation rate in the near future (in the next two to three years) doesn’t exist – it can occur in India once again only if the entire world economy gets into a deeper recession.

An aggressive tightening of the benchmark rates, to the extent of 375 bps since April 2009, has led to a near stagnation in the industrial economy. Going forward, the benchmark rates should fall by at least another 75 bps by the end of 2013, in line with moderation in the inflation rate. In our view, a 75 bps cumulative cut implemented in the last nine months is not enough to pull up the domestic industrial economy significantly. However, if India receives a normal rainfall and the crude oil prices moderate significantly (due to further slowdown in the world economy in the current year and a gradual increase in oil production in the US), we could see as much as a 125 bps cut in the repo rate by the year end.

We are quite optimistic on the INR and expect it improve to Rs 50 against the USD by the end of 2013, provided the government succeeds in controlling the import of gold, which roughly accounts for half of the Current Account Deficit (CAD).

In terms of chronological order, improved corporate earnings for the December 2012 quarter, a favourable Budget, significant FDI inflows into the aviation and retail sectors, and a forthcoming monsoon performance would provide further triggers to the market till October-November 2013. However, the fag end of the year 2013 would see some weakness in the markets due to an anticipated selling of equities by FIIs on the eve of the 2014 general elections.

We expect the emerging markets, including India, to do relatively better as the Euro zone and Japan continue to suffer from economic slowdown, while the US faces pressures due to its fiscal conditions and unemployment.

We believe that the year 2013 is set for individual stock stories to play out, as an overall upside to the market is capped at about 15 per cent. However, the banking sector, especially the old private sector banks (like City Union Bank, Karur Vysya Bank and South Indian Bank) will outperform. Some select, reasonably valued FMCG companies (ITC), Mid-Cap IT (Polaris Financial, Hexaware) and Mid-Cap Pharma companies (JB Chemicals, Indoco Remedies) and Tyre companies (MRF, CEAT) would outperform the overall equity markets.

At this juncture, we suggest retail investors to follow value investing – use actual fundamentals and not news flows/perceptions to guide your investment decisions. It is suggested that one must avoid tactical risks like investing in companies which are highly leveraged or in which a large proportion of promoters’ holdings are pledged or which lack credibility in terms of management quality. Be an investor rather than an active trader. Bet on quality Mid-Cap ideas which haven’t played out already in a big way in the market place.