Invest In Equity Markets Through SIPs

INTEREST RATE SCENARIO

Interest rates are likely to be cut by at least 75 basis points in FY14 in order to boost business sentiment and the investment environment.

A PROMISING MARKET

Compared to the other emerging markets, India seems more likely to attract greater capital flows given the long-term potential for growth.

The current scenario of the Indian market is that of greater fear and lesser greed. The situation has been precipitated by lower-than-expected GDP growth, high fiscal and current account deficit, elevated inflation and interest rates, which continue to affect earnings. Decontrol of diesel and petrol, a cap in subsidised LPG supply, as well as an increase in passenger and transport costs have affected short-term and medium-term consumption. GDP growth stood at 4.5 per cent in Q3FY13, and full year growth for FY13 is projected at five per cent. Political instability and fear of early elections are also keeping investors at bay.

Compared to the other emerging markets, India seems more likely to attract greater capital flows given the long-term potential for growth. India is a diversified economy and does not rely majorly on a single factor for growth, unlike Brazil and Russia. China is still in the process of transitioning from an export-oriented economy to domestic consumption. Despite the slowdown in India’s GDP, its growth is higher than that of most emerging economies barring China.

The Q4FY13 results are likely to reflect a slowdown in growth across sectors. Where sectors like Automobiles, Banking, Oil & Gas, FMCG and Cement are likely to disappoint on their topline growth, Oil & Gas, IT and Pharma may show a moderate growth in their bottomline. An increase in freight costs may impact the earnings of some cement companies. The banking sector may witness further compression in NIMs on muted credit growth. The reforms and hard measures taken by the government in the past six months will reflect negatively on the earnings in the quarter.

Inflation is showing signs of moderating at 6.84 per cent in February 2013 and consensus estimates of ~6.3 per cent in March 2013, despite a hike in diesel prices and a consequent rise in transport costs. However, the continued increase in diesel prices and the latest bouts of freight increase may keep inflation at elevated levels in the short term. Nevertheless, with the slowdown in IIP, a fall in Brent crude and metal prices, a bumper rabi crop, a stable INR/USD and high base effect, inflation is likely to fall to ~5-6 per cent in the next three-six months.

The current economic scenario gives us the sense that interest rates are likely to be cut by at least 75 basis points in FY14 in order to boost business sentiment and the investment environment.

Liquidity in the global markets is likely to remain abundant despite the likely end to the bond buying programme in the months to come, as revealed by the FOMC’s minutes. Japan’s pledge to double the supply of money in two years and China’s commitment to boost its economy may continue to give a booster dose to the global markets. In the last year, US and Japan were the best performing markets. This year, we may see the Asian markets (ex-Japan) doing better as the developing Asian economy is expected to grow at 6.6 per cent from the previous 6.1 per cent, according to ADB data.

The Oil & Gas sector looks promising following the reforms in the sector. We may expect upstream, downstream and E&P companies to outperform in the next one-two years and the longer term horizon. Our top picks are Oil India, IOCL, BPCL, Cairn India, Engineers India, NMDC, Dabur, Pidilite, LICHF, Mahindra Finance, Exide, Amara Raja Batteries, Max India, Madras Cements, Bata, L&T, IL&FS Transportation, Tube Investments, Indian Hotels, Blue Star and Rallis India.

Retail investors should invest in the equity market through SIPs. Proven good management, sustainable business model, high return ratios are some prerequisites. Investors who cannot give time to study the companies should always choose mutual funds or the PMS route. We must remember that equity investments always come with risks, and hence, one must evaluate the maximum risk possible before taking a call on a particular stock or mutual fund.