Markets Gearing Up For All-Time High

IMMINENT CUES

There are at least three triggers for the markets – an impending policy rate cut by the RBI in its January policy review, further reform measures by the government in the budget session and the issue of raising the debt ceiling in the US and sequestered spending cuts.

ONWARD AND UPWARD

With an improvement in fundamentals on both the macro and earnings front, the markets are gearing up for an all-time high, and we have a 22000 target on the Sensex in the next 12 months.

Lalit Thakkar
Managing Director – Institution Angel Broking

2013 has started off on a positive note for the equity markets. Following a healthy 25 per cent gain in 2012, the Sensex reclaimed the 20000 mark in the last week, the highest level the index has touched post 2011. The markets are riding high on the momentum gained by the reforms process and the benign global liquidity flows.

The recent announcements regarding railway passenger fare hikes and the proposal to make diesel prices more market-linked are relatively tough political decisions and indicate the government’s serious intent on fiscal consolidation. In addition, a clarification on GAAR and its deferral by two years is also expected to cheer overseas investors. The markets are upbeat on positive global cues such as the partial aversion of fiscal cliff in the US and the fiscal stimulus unleashed by Japan to revive its economic growth. In the near-term, there are at least three triggers for the markets – an impending policy rate cut by the RBI in its January policy review, further reform measures by the government in the budget session and the issue of raising the debt ceiling in the US and sequestered spending cuts.

Even the macro fundamentals are expected to improve going forward. Growth is likely to have bottomed out for FY2013 and a moderation in inflation, particularly the easing of core inflation, is a welcome respite since it augurs well for the interest-rate environment. However, the twin-deficits – current account and fiscal deficit – will continue to pose a challenge in the near-term. The CAD at 5.4 per cent of GDP in Q2FY13 poses a rather precarious situation, as external demand remains constrained and oil imports are high. This is likely to continue weighing on the currency. But overall, I remain optimistic since the reform measures by the government are likely to revive business confidence and investments in the economy, thereby resulting in an improvement in economic growth in the medium-term. In my view, the government should take additional constructive steps to improve its fiscal health, attract non-debt creating capital flows, strengthen the supply chain and remove bottlenecks, enable speedy land acquisition and expedite infrastructure investment.

As the investment environment improves, we are increasingly bullish on cyclical stocks. In that regard, private sector banks are our preferred picks since they have strong capital adequacy and can further raise equity capital at high premiums. As we know, they have also maintained better lending standards, which is now reflecting in their asset quality that is far better compared to that of PSU banks. In addition, long-term structural growth drivers of the domestic automotive industry such as GDP growth, favourable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support growth in auto volumes going forward. We expect the interest rates on retail loans to be lower by 100 basis points, so that is also a positive catalyst on the near-term horizon, especially for four-wheeler companies.

Amongst defensives, we prefer the IT sector, and within that, we expect the large-caps to outperform. We believe that the IT sector can record at least an 8-10 per cent dollar growth, and expect about three-four per cent currency depreciation. So overall, IT companies should be able to deliver at least 14-15 per cent of earnings growth, which is quite decent. Pharma stocks seem expensive at a PE of 17-18x, but they are expected to continue delivering 18-20 per cent growth as the Indian market share in total global pharma exports is still very low. Besides that, FMCG stocks are not excessively over-priced and we have to live with their PE levels of 25-27x. They too warrant a place in the portfolio, though one can be slightly underweight on them.

In the near-term, there is every possibility that the markets may witness some correction after a sharp rally, but largely, the uptrend is likely to continue. I believe that with an improvement in fundamentals for macro and earnings, the markets are gearing up for an all-time high, and we have a 22000 target on the Sensex in the next 12 months. At the same time, I believe that the broader market comprising mid-caps and small-caps is likely to outperform.

In my view, retail investors have maintained a more cautious outlook as compared to foreign institutional investors, who remained bullish. Valuations are close to their long-term averages, but there are still reasonably priced quality stocks and I would recommend that retail investors take this opportunity and invest in good quality companies. Also, empirical evidence suggests that equities have historically given a better inflation-adjusted return over most other investment instruments. Hence, investors should adopt a goal-oriented and disciplined approach to investing, while periodically reviewing their portfolio for healthy returns.