Markets waiting for a turnaround

SUNIL JAIN
VP - Equity Research - Retail
Nirmal Bang Securities

We see a lot of fear and pessimism in the markets now, as a result of which investors are shying away from parking any more funds in them. The volumes have come down. All these issues are led by concerns over growth in the Indian economy and those related to the international markets.

The earnings season is about to start. The Q3 FY12 corporate performance will be more biased towards the negatives than the positives, led by slow growth, a decline in operating margins, an increase in interest costs and the impact of rupee depreciation. We had seen declining results in Q2 FY12, and the trend of decline will continue in Q3 FY12, except in a few sectors like pharma, IT and FMCG, where we may see some improvement in results.

The market is already factoring in the negative results. If the results come out to be worse than what they are expected to be and the outlook for Q4 FY12 turns out to be gloomier, only then will the markets see a further downfall. We feel that the results will be in line with the expectations and the markets may remain in the range of 4600-4900 on the Nifty during the results season. Inflation seems to have peaked out in the current cycle, and it is likely to come down in the coming period.

The RBI has taken enough measures to control inflation, and the impact of the same is already visible in the lower demand and growth. The same will translate into lower inflation in the coming period, which will lead to a change in focus of the RBI from controlling inflation to growth. What can come in the way of declining inflation are the crude oil prices, which are still running high. Any geopolitical
issue can take the oil prices even higher. Lower inflation will lead to lower interest rates, which will be positive for the overall economy, and more so for interest-rate sensitive sectors like infrastructure, real estate, auto and banking. Yes, the pause button has already been hit. We see interest rates having peaked out, and these will start coming down in the next one month or at least in the next three months.

The US market has already shown revival and some strength, and this is likely to continue for some time. The problems in the Euro zone have been addressed for the time being, with the ECB infusing Euro 489 billion into the European banks. China’s list of problems is similar to ours, with monetary tightening by the central bank and a high risk of bad loans, etc. The central bank there has already started reducing the reserve requirement of banks to ease liquidity. Once inflation comes under control, China will also start focussing on growth.

The key triggers for the Indian equities market on the upside will be the RBI commencing interest rate reduction, crude oil prices coming down to say USD 85 per barrel and the government starting to take some positive policy action. Currently, we are positive about IT, pharma, FMCG and selectively on metals and banking stocks. We feel that one should first reshuffle one's existing portfolio, and consolidate the same in select Large-Cap and good quality Mid-Cap stocks. Apart from this, one should also start investing on declines, albeit in parts, and build up a portfolio that can give good returns when the markets turn direction.