REFORMS WILL KICK-START THE ECONOMY

The Indian economy is currently at a sweet spot with falling commodity prices, inflation moderating out as measured by both CPI and WPI even as the much talked about twin deficits are also within control. These are influencing the stock market in a positive way with the figure touching a new high every passing week. The global markets, however, remain an area of concern. They will remain weak as all the three major global economic units i.e. Europe, US and China are not at their best. Europe continues to face severe headwinds of deflation; growth has continued to remain a challenge in the US; and China is clearly slowing down while probably registering the slowest growth in a decade.

Nevertheless, going forward, the key triggers for the market will be the Big Bang reforms like the introduction of GST, labour reforms, Insurance Bill, and others. With a favourable verdict for the ruling party in the key assembly elections of Maharashtra and Haryana, the pace of reforms is likely to accelerate and it also reinforces the government’s current reform initiatives. Interest rates that have remained at a much elevated level over the last few years will remain stable in the current fiscal and we may see a cut in interest rate in the beginning of the next fiscal. What will also help the stock market is steady local currency. The Indian rupee is likely to remain stable over the next 12 months and trade in the range of Rs 59 to Rs 63. Strengthening yields in the US’ market will put downward pressure on INR but it will be well-balanced by renewed growth prospects and strong capital inflows leading to surplus in balance of payments.

Coming down to the current earning season, we expect earnings growth of 11.8 per cent on a yearly basis in the second quarter of the current fiscal. Q2 FY15 is likely to be a tepid quarter with earnings’ growth driven by low base effect in sectors like capital goods, cement and financials while the oil & gas sector will report negative earnings growth because of decline in crude prices, which have come down significantly on a yearly basis. However, the sectors that will demonstrate robust earnings growth will be telecom, automotive and agriculture inputs. The IT sector has reported disappointing earnings which has surprised us considering the second quarter is seasonally the strongest quarter for these companies. Overall we believe that the second half of FY15 should see some pick-up in activity with reforms, lower crude prices and improving economic growth prospects.

Going forward, we would like to zoom in on the financial sector as it will witness strong tailwinds with the taming of inflation that will improve liquidity and lead to the lowering of money market rates. All this will benefit companies like ICICI Bank, Axis Bank, and housing finance companies. In telecom we are bullish on Bharti Ltd., notwithstanding the impending mega auctions as voice realisations and data growth are in a structural upturn. Apart from these, we are in favour of cement as early cyclicals and automotive as a play on discretionary consumption.