Invest In Mid-Cap Stocks
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Sunil Jain
Head, Equity Research – Retail, Nirmal Bang Securities
The movement of food prices in the forthcoming period is likely to have a major bearing on headline inflation numbers as they continue to remain up and will be influenced by the upcoming monsoon season.
The Indian equity markets will be driven more by fundamentals in FY14. A decline in inflation and interest rates, reduction in crude prices, government initiative to revive infrastructure, revival in consumer demand and capex will be the major triggers for the markets to perform here on.
We have seen a sharp run-up in the Indian equity markets in the past 15 to 20 days driven by the lower inflation number for March 2013, a short covering and declining commodity prices. Overall, the earnings of the Indian corporates are under pressure but some initiatives by the government, reduction in interest rates and decline in commodity prices may aid improvement in their performance.
If we compare the Indian equity markets with other emerging markets, China is down by 3.34 per cent, Brazil is down by 2.46 per cent whereas Indonesia is up by 15.8 per cent, Thailand is up by 13.5 per cent and Philippines is up by 21.4 per cent as compared to India, which is down by 0.40 per cent. Before the recent run-up, the Indian markets were underperforming as compared to most other emerging markets. If the decline in inflation continues, then we may see further improvement in the equity markets.
Considering sectoral performance, we have seen a mixed bag of results in the IT pack with TCS and HCL reporting better-than-expected earnings, while Infosys and Wipro reported below-expected earnings. In the banking sphere, few private sector banks have reported results that are in line with market expectations. In the steel sector, however, there is some pressure on realisation (JSPL) while the Consumer Goods sector is facing a lower demand (Bata). Overall, the Q4 earnings of India Inc. are likely to be subdued.
The last year saw inflation holding up consistently and declining marginally in the few concluding months. The higher inflation was attributed to the rise in food and fuel costs. The March 2013 inflation figure going below six per cent has created some hope for reduction in interest rates by the RBI.
In the last few months, the government has taken a number of actions like increasing diesel price, railway freight, and power cost, eventually leading to an increase in inflation. On the other hand, a decline in commodity prices like metals, coal, oil etc. will help in reducing inflation. But the key variable will be the movement of food prices in the forthcoming period which is likely to have a major bearing on headline inflation numbers.
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Food prices continue to remain up and will be influenced by the upcoming monsoon season. Overall, barring food prices, we believe that inflation figures will tread downwards in FY14.
Post March 31, there has been a good correction in interest rates, be it for the short term or long term. The call money rate has come down from around 9.50 per cent to 8.6 per cent and the 10-year government bond yield has come down to a 52-week low at 7.75 per cent. A weaker demand for money from corporates, release of funds by the government post FY13 and a decline in inflation rate for March 2013 was primarily responsible for this decline, thereby creating hope for a rate cut by the RBI.
While interest rates are heading downwards, the question is at what pace will it decline. This will mainly be determined by the extent of inflation.
We have seen tremendous pressure on the trade deficit in the last year which was funded by capital account to an extent. The current account deficit (CAD), as a percentage of GDP, reached its highest level in Q3FY13. The government has taken various initiatives to improve the situation. Crude oil prices too have softened in the recent past. All this will lead to an improvement in the CAD. We feel that the overall situation of external trade and CAD is likely to improve, leading to economic stability or appreciation of the Indian rupee.
As regards the indices, we had seen a wide fluctuation in the last year with the Nifty making a low of 4600 and a high of around 6100 despite the aggregate earnings of Nifty 50 stocks remaining more or less same for FY12 and FY13. A tug of war between fundamentals and global liquidity was witnessed last year. But now, the impact of global liquidity on the Indian equity markets is reducing. Going forward, the Indian equity markets will be driven more by fundamentals in FY14. A decline in inflation and interest rates, reduction in crude prices, government initiative to revive infrastructure, revival in consumer demand and capex will be the major triggers for the markets to perform here on.
Japan is witnessing a massive liquidity infusion to revive its economy, while China is fighting a housing bubble and trying to reduce its dependence on global demand with the development of domestic consumption. Europe has not been able to revive and the US economy is recovering. Liquidity infusion by developed economies will definitely have its impact in reviving the global economy. But one should also be cautious about reversal of liquidity infusion. Until then, the global equity markets will continue to perform.
We would like to be more stock specific than sector specific in the current scenario. Stocks like Axis Bank, M&M Finance, Godrej Consumer, NMDC, Aegis Logistic, Finolex Cable, CESC, IPCA Lab, Lupin, ING Vysya Bank and Oriental Bank of Commerce can be considered.
The outlook for the Indian equity markets is positive from a one-year perspective. The recent past has seen a very good run-up and we will have to wait for some correction to make fresh investments. It is advisable to look for quality stocks in Mid-Cap, which can give much higher returns than the overall indices.