Take equity exposure in a volatile market

PANKAJ PANDEY
Head - Research
ICICI Securities

After posting their best ever performance for January induced by liquidity and better risk appetite, we expect the markets to consolidate over the next two-three months. However, volatility is likely to get amplified as the markets take cues from domestic events like the outcome of polls in five states, the Q3 GDP number and the Union Budget 2012 (which may provide visibility on reforms). The outcome of events in the Euro zone may also keep the markets volatile till March 2012. Clarity on macro headwinds such as monetary easing (given that the RBI has begun the loosening process with the recent CRR cut), the direction of commodities and the rollover of focus onto the FY13 earnings outlook will also act as key catalysts for markets ahead.

As expected, the Q3 results have been mostly muted so far. Given the recent rally in the markets though, especially in beaten down stocks, we believe that the markets are looking beyond the quarterly numbers, as stocks were badly hit during the last two months of 2011. We sense that the markets are keener to determine whether the worst of the macro headwinds are behind us or not. The recent readings of inflation, particularly food and primary inflation, have been encouraging. Given the steep rate hike and slowdown in industrial activity, we believe that manufacturing inflation will start moving south in a few months. 

The recent CRR cut and encouraging inflation data mark the peak of the rate tightening cycle. We expect policy rates to start coming down from Q1 FY13 given that all components of inflation behave positively, as we believe that crude prices can provide a jolt in case of a global geopolitical standoff. 

On the global front, the proceedings of the Euro zone crisis and the progress on the resolution/bailout programme will retain centre stage. Coupled with this, the magnitude of economic weakness in the US and the intensity of slowdown or revival in the Chinese economy will also be vital to gauge the flow of liquidity across continents. These issues will also be catalysts in determining commodity price trends.

However, as far as India is concerned, the government’s policy action will be a critical factor in scaling up sentiment and putting the economy back on the growth path. Of late, another variable to watch out for is the movement in the exchange rate. If all these global and local factors play out favourably, the volatility in exchange rates could be arrested, which is evident to some extent even now.

We believe that relatively safer sectors would continue to lure investors as the ‘capital preservation despite lower returns’ theme is unlikely to fade away. Thus, we continue to prefer the IT (rupee to benefit, though valuations expensive), pharma (rupee and patent expiry to benefit, yet valuations seems expensive), telecom (financials to improve, reducing regulatory uncertainty) and auto (lower base, lower commodity, peaking interest rates) sectors. We are neutral on FMCG (expensive valuations, pressure on margins), banking (NPA concerns mounting, valuations cheap) and oil & gas (elevated crude prices, limiting pricing headroom).

We believe that CY12 (or at least H1 CY12) will be a volatile period, as the markets will be highly reactive to news emerging from the western world. Also, the markets will respond sharply to any surprises on the political/economic front from within the country. In such a scenario, we would stick to our previous strategy of buying equities systematically without bothering about the market levels (more so with individual stocks hitting lifetime lows). Retail investors can also take exposure to equities via the mutual fund route. Thus, we would recommend buying into equities from a three to five-year perspective on a staggered basis.