Increase Exposure To Equities

• Weak Q4 Numbers
  The fact that the Q4FY12 numbers are not likely to be good is already well discounted by the markets.
• Guiding Factors
  Rather than results, we believe the markets will look to other factors such as inflation, the monsoon, crude prices and government actions for direction.

2012 has started off eventfully. It began with the Euro zone leaders agreeing to bail out Greece and favouring pragmatism over ideology by allowing the ECB to print Euro 1 trillion. This was a key factor in the sharp market rally. Now, GAAR has emerged as a thorny issue. It has impacted short term inflows, which may resume only once the government gives some clarity.

The Euro zone crisis also seems to be coming back for an encore, as Spain appears to be getting into trouble again. This is an issue that will be resolved over a longer period and in an orderly fashion. Even the US economy is beginning to see some improvement, with unemployment heading lower and corporate earnings growth improving.

As growth picks up, the fiscal concerns will be resolved. Similar will be the path of revival for other countries. Amongst EMEs, China is finally showing signs of losing steam and coming to a more realistic 7.5 per cent growth trajectory. This should keep a check on commodity prices and should also improve the relative positioning of India when it comes to emerging market allocations.

The fact that the Q4FY12 numbers are not likely to be good is already well discounted by the markets. In this backdrop, on the one hand, Infosys continued its streak of disappointing quarters, coming out with a lower-than-expected eight to 10 per cent revenue growth guidance for FY13. On the other hand, the first of the private bank numbers, i.e. HDFC Bank reflecting a growth of 30 per cent, reflects the robust performance that can be expected from banks. Broadly speaking though, we believe that rather than the results, the markets will look to other factors such as inflation, the monsoon, crude prices and government actions for direction.

For now, the outlook for the monsoon is positive. On another front, if the easing geopolitical conditions help cool down crude prices, it could act as a major trigger. Also, if the government pushes the GST process forward by September, it could uplift the overall market sentiment. If it takes a more lenient view on the application of GAAR to FII inflows, that could help the markets as well.

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The inflation situation too, though not at the ideal levels, is certainly better than that in FY12. The RBI and the markets are well aware that some items in the WPI, such as electricity and crude oil, are not reflected at their current prices. High interest rates have taken a toll, and the demand side is weak. The RBI has echoed these macro conditions with its 50 basis points cut, and over the next few months, broader lending and deposit rates could inch downwards.

Regarding the country’s balance of payments (BoP), in FY12, we had a current account deficit of four per cent, due to which the rupee moved from the 44 levels to end up at the 51 levels. In FY13, we expect the current account situation to be better due to the depreciated rupee. Overall, the rupee should hold on to the 51-52 levels with a depreciating bias till our BoP situation improves conclusively.

In the defensive space, we remain positive on IT, which is likely to deliver a healthy 15-16 per cent growth in rupee terms based on the INR 51-52 levels that we expect rather than the 48-49 levels that the markets are factoring. Coming to the cyclicals, we recommend taking higher weightage in banking and capital goods, along with some exposure to large integrated metal companies.

Equities are a great asset class to invest in now, especially because they have seen a four-year correction and are ripe for giving good returns, as the earnings growth outlook improves. Reducing inflation and interest rates should perk up the future outlook during the H2 FY13, as the outlook for the FY14 earnings growth also improves. A multiple of 15x to the FY14 earnings will then be more appropriate, which translates into a Sensex target of around 22000 by the end of March 2013. Investors should take this recent correction in the markets as an opportunity to increase their exposure to equities.