Buy Incrementally On Drawdowns

D Gaba
Managing Director
Fairwealth Securities

• Markets' Millstones
  A slowdown in FII inflows due to GAAR and other issues has weighed heavily on the market psyche. Overall policy paralysis, a depreciating rupee and an uncertain outlook for Europe have added to the woes.
• Looking Up Ahead
  Post the interest rate cut, the environment for the banking and infra sectors will improve. The Pharma and Consumer Discretionary stocks also remain our favourites.

At present, the market is witnessing great volatility. A host of worries are weighing it down, and it is evident that things have changed for the worse post the budget. A slowdown in FII inflows due to GAAR and other issues has weighed heavily on the market psyche. The overall policy paralysis has been a big negative as well. We have also had a depreciating rupee and an uncertain outlook for Europe adding to the woes of the market.

Right from the beginning of the year until the time of the Union Budget 2012, the markets had seen a good flow of funds as overseas investors were keen to invest in emerging markets in what was called ‘risk-on’ trade. Beginning March and April though, things slowed,and the FIIs are currently net sellers. All said, we need to give a little time for things to settle down before we can expect a good up-move. Even as compared to the other emerging markets, we have broadly underperformed in the last couple of months.

Q4FY12 has been alright in terms of India Inc.’s performance, with no major outperformers and not too many negative surprises. In terms of numbers, the private banking players seem to have managed their problems well and have surprised positively. IT, as a sector, has disappointed in the guidance provided by the majors. This could be an indication that the US recovery is perhaps not as smooth as we would like to imagine, given that IT companies get a fair bit of business from there. In other cases, it has been more stock specific. Infra companies too have shown a recovery in their order inflows, which augurs well for their future performance.

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The recent petrol price hike has put a new spin on things. If this is followed by a diesel price hike, as is widely expected, inflation will rear its head again. Food inflation is already a concern, and a hike in diesel prices will directly impact the transportation of food materials, which in turn will further exacerbate the inflation numbers. Overall, an increase in costs will make itself evident. The RBI has already cut the CRR by 50 basis points. While it has been ahead of the curve and surprised the markets, now, the regulator is not likely to slash the rates unless it sees inflation cooling off significantly.

The INR looks set to breach the 57 level against the USD, unless the central banker takes some stringent measures. It is not good for any economy to have a depreciating currency. While the obvious negative impact is on imports and oil purchase, there are various other fallouts too. Companies that had raised money via FCCBs, for instance, or had other debts in dollars will suddenly see their interest burdens expand. The only possible beneficiaries are the IT and Pharma companies, which are exporters. However, IT is not reacting favourably, with muted guidance ahead.

The elections in Greece on June 17 will make the European picture clearer. Any hopes of risk-on trade resuming can only materialise after that. A revived currency and lower crude prices would also benefit the markets. Most importantly, improved internals either in terms of policy action or in kickstarting the economy in other ways would be the most lasting market trigger.

In Europe, the situation is very delicately poised. The elections in Greece are almost a referendum on the issue of whether the country will stay in the Euro zone and agree to austerity measures or whether it will break away. All bets are therefore off till the outcome on that front is clear. The US economy is recovering in fits and starts. Europe normally follows the US with a lag of six months, so hopefully, things will soon settle down there too.

We especially fancy the banking and infra spaces, with a six month horizon. Post the interest rate cut, the environment for these sectors will improve. Pharma and Consumer Discretionary stocks also remain our favourites.

Investors should buy with a slightly long-term horizon. While it is definitely a good idea to make use of trading opportunities, the levels that some bluechips are available at make us believe that if one buys incrementally on drawdowns and stays invested, there is good money to be made.