ALEX K MATHEWS

Head, Technical and Derivatives Research

Geojit Financial Services

In its recent report, the World Bank has cut its forecast for growth in the global markets. The bank has clearly stated that there is a slowdown in the Euro zone, which will impact emerging markets like India and Mexico. It has predicted that the world economy will grow at around 2.5 per cent this year as compared to its earlier estimate of 3.6 per cent made in June 2011. This is a point of concern that may negatively impact the markets. Though, the rupee which has started appreciating now, and the government’s move to allow 100 per cent FDI in single-brand retail and a consideration of 49 per cent FDI in the aviation sector are steps that may have some positive impact on the markets. 

Currently, we are in the middle of the earnings season. At present, I do not think that India Inc’s Q3 FY12 results will be very good. Headwinds like higher interest costs and input costs are still playing spoilsport for companies. We may be able to see a bounceback in quarterly numbers from Q4 onwards. 

However, not all stocks will report bad numbers. Certain sectors like IT, for instance, have already come out with a good set of numbers. Pharmaceutical firms are also likely to report favourable numbers. Companies like HUL and ITC have announced good results despite increased input and raw materials costs, and we can expect a decent set of numbers from other players in the FMCG sector as well. The banking sector needs to be watched closely. HDFC Bank has come out with positive numbers, and there are other private banks too that could surprise us with their earnings. On the Capital Goods front, though, there are still some concerns, and I do not expect the sector to post better results in this quarter. 

Several macro headwinds have affected the Q1 and Q2 performance ofcompanies in the current fiscal. Headline inflation, which is hovering around seven per cent, is still above the RBI’s comfort zone. Inflation on the manufacturing side has come in at seven per cent as compared to five per cent a year ago, and this is a concern that needs to be looked at closely. Nevertheless, the fact that headline inflation has started coming down may prompt the RBI to start reversing the interest rates by 25 to 50 basis points. However, I believe that the interest rate cut may not come in the next meeting of the RBI slated for January 2012, but may be effected from the meeting in March 2012. 

On the global front, there have been some developments in the US that have sent some positive vibes in the market. But growth prospects there are neutral for at least the next couple of quarters. With respect to Europe, I have already mentioned the World Bank report, and the crisis there will affect emerging countries like India and Mexico. 

Going forward, the government’s policy-making initiatives will be the primary trigger for the markets. There are many policies that need amendment and approvals, and these can act as a catalyst for the markets, for eg. FDI in multi-brand retail. Apart from this, the narrowing down of the budget deficit and rupee appreciation could be market uppers. Also, money flowing from the FIIs and inflation coming down to the comfort zone of the RBI may act as additional stimuli. 

By the end of CY12, we can expect to see the Sensex at 18500 levels. The present market is not one in which you should sell, rather it is a market in which you should buy. This is a bear market, and investors should look forward to buying quality stocks at lower levels. If India can sustain its growth, this could mark the beginning of a new era.