Asset Allocation: Key To Investment

Amit Khurana
Director – Research
Dolat Capital Market

INFLATION, CURRENCY AND COMMODITY PRICES

Speaking of the inflationary trend, the trajectory seems to be going downwards and the trend seems likely to continue for the next few months. Another challenge is that of the depreciating currency. If there is a situation of the currency facing major pressure (let’s say going down by 10 per cent), then this whole advantage of softening of commodity prices would get neutralised to a certain extent. Then the situation of inflation would not go down as sharply as expected by the markets. This softening of commodity prices has to be supported by the rupee which should not depreciate too fast.

PERFORMING SECTORS

At this juncture, we are positive on Pharma. We are also good with the banking sector – stocks like SBI and PNB on the Large-Cap and Karur Vysya Bank in the Mid-Cap space look attractive. We remain negative on Metals. There is a liking for IGL in the Oil & Gas space and M&M in Auto. We would also recommend Pidilite in the Consumer sector. A few generic Mid-Caps will do better. That includes Supreme Industries and Astral Poly. KPIT and Oracle in the IT sector will do well too.

While talking about the Indian markets we have two different views. The short-term view is that the markets would trade in the broader band. So, we are not taking any significant directional stand here. The markets are likely to react to news inflow and keep moving in a broad-trading band, which could be as wide as plus minus 10 per cent. We are not really expecting any major directional moves on the markets in the near term. 

On the other hand, from a broader perspective, say in the next 12 to 18 months, the markets will probably be reacting to the possibility of interest rate reductions and the GDP numbers bottoming out. So, we are slightly positive from a long-term perspective, while from a near-term perspective, it is mostly a range-bound market.

As we compare India with other emerging markets, I think there are two ways of looking at it. One – if you consider the BRICS block, India stands in a good position because the commodity prices coming off will be of great help for the Indian companies. This view is also based on our various interactions with foreign investors. India continues to be an economy which is deficient on the capital front. We consistently face a challenge to attract enough foreign flows to sustain growth and fund our current account and fiscal deficit numbers. 

Talking of the corporate performance of India Inc., we feel that the quarterly numbers were broadly in line with market expectations, excluding a few deviations here and there. The markets typically work on a relative basis. If the market expectations are met, they feel good about it. 
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A couple of numbers surprised us though. Pharma results were pretty good, especially the view that came out post earnings. So this sector stood out in a way. On the negative side, the infra sector continued to disappoint. Going forward, our sense is that we will possibly be doing low double-digit growth on the index numbers. That’s what we are looking at. Now, the market seems to be building in various ranges of that. It will be more like a 12 to 13 per cent growth. That seems pretty achievable. Any significant upgrade from here is not very likely at least for the first half of FY14. That will mostly depend on how the key variables, especially inflation and currency work out. We are putting in a low double digit growth for FY14 earnings.

Speaking of the inflationary trend, the trajectory seems to be going downwards and the trend seems likely to continue for the next few months. Another challenge is that of the depreciating currency. If there is a situation of the currency facing major pressure (let’s say going down by 10 per cent), then this whole advantage of softening of commodity prices would get neutralised to a certain extent. Then the situation of inflation wouldn’t go down as sharply as expected by the markets. This softening of commodity prices has to be supported by the rupee which should not depreciate too fast.

Interest rates is another important aspect here. It will be driven by softening commodity prices and a stable currency. We will see a meaningful interest rate reduction if these two are in place. While the market seems to be building very high expectations on this, we believe that the interest rate reduction it will be quite measured and we would not rule out a ‘no rate cuts’ scenario either. The next expectation in the policy meet due in July 2013 will depend on a lot of other variables that we spoke about.

At this juncture, we are positive on Pharma as a sector. We are also good with the banking sector – stocks like SBI and PNB on the Large-Cap and Karur Vysya Bank in the Mid-Cap space look attractive. We remain negative on Metals. There is a liking for IGL in the Oil & Gas space and M&M in Auto. We would also recommend Pidilite in the Consumer sector. A few generic Mid-Caps will do better. That includes Supreme Industries and Astral Poly. KPIT and Oracle in the IT sector will do well too.

We thus feel that retail investors need to allocate a part of their money to the equities as an asset class with a clear intent of running it for at least two to three years. Indian markets are attractively priced. Growth will certainly continue to sustain even if that is at lower numbers. Equities will offer far better results on a risk-adjusted basis in the long run. So, there will be volatility in the short term and retailers will have to be careful not to be carried away. 

I would advise them to do consistent allocations either on a monthly or quarterly basis and run that entire investment at least for two to three years. In case they do not have the time to manage their investments on their own, or are unable to understand the fundamentals of finance and investing, it is best for them to go through the mutual fund route.