Indian Equities: Still Compelling

Lalit Thakkar
MD-Institution 
Angel Broking

• Fed’s QE Policy
  Stimulus tapering is likely to be done gradually and in an orderly fashion as the US economy strengthens, without bringing to bear any risk to global financial stability.
  
  
• Domestic Outlook
  In the medium-term, a moderation in gold demand and the shift in preference towards saving in financial assets would boost investment in the economy. Exports are expected to get a fillip from depreciation and economic revival in the US.

The equity markets are currently in a risk-off mode, largely over-reacting to the tapering of liquidity and the US Fed’s exit from QE. In my view, the Fed is unlikely to be in a hurry to taper stimulus, particularly when the green shoots of recovery are just starting to take hold. The Fed looks firmly in control of its policy as commodity prices continue to remain benign, keeping inflation within the comfort levels. So, the tapering is likely to be done gradually and in an orderly fashion as the economy strengthens, without bringing to bear any risk to global financial stability.

On the domestic front, things are surely falling into place with growth bottoming out, a substantial easing in inflation and narrowing of the fiscal and current account deficits. WPI inflation has gone down considerably to 4.7 per cent in May 2013 from an average of 7.4 per cent in FY2013. I believe that CPI inflation is also likely to decelerate considerably owing to food inflation coming down with the onset of a normal monsoon, decent rabi production and the moderate minimum support price (MSP) hikes for kharif crops. The lowering in inflation is a huge respite and I believe that this is likely to have a cascading positive impact on a number of economic variables such as boosting financial savings, breaking the wage-price spiral, etc.

Despite an almost 16 per cent correction in gold prices since January 2013, gold imports have increased by 121 per cent YoY in April 2013 and 88 per cent YoY in May 2013. I believe that this excessive buying of gold can be attributed to front-ended demand and is likely to normalise going forward, especially since investment demand for gold is expected to dampen. In the medium-term, a moderation in gold demand and the shift in preference towards saving in financial assets would boost investment in the economy. At the same time, exports are expected to get a fillip from depreciation and economic revival in the US. Going forward, I believe that the INR is likely to stabilise in the range of 57-59 as concerns in the global markets over QE3 recede and gold imports decline and exports witness pick-up on the domestic front.

Despite the considerable deceleration in inflation, the RBI stayed put on rates in its June monetary policy meeting owing to the currency weakness and the risk of reversal in capital flows. I maintain that with inflation trending down, the RBI is likely to reduce the repo rate by 50 basis points during FY2014 to stimulate economic growth. Owing to the still high growth and real interest rate differentials, the economy is likely to continue attracting healthy capital inflows.
As far as corporate results are concerned, the revenues are being impacted by the slower pace of economic growth. As a result of the deceleration in revenues, we have been witnessing modest earnings growth over the past few quarters. On a positive note, though, the margins have largely bottomed out.

We are bullish on the BFSI, IT, FMCG and Pharmaceuticals space. Among banking stocks, new private banks are expected to continue outperforming their nationalised counterparts and older private banks. In addition, private banks have maintained strong capital adequacy. They also have better lending standards now, which is reflected in the fact that they have much better asset quality as compared to PSU banks. We prefer the IT sector, particularly the Large-Cap companies, in view of the healthy earnings owing to INR depreciation and fair volumes growth. For the FMCG sector, topline growth is expected to come in at healthy levels owing to higher volumes, better realisations and superior mixes. Pharma stocks are also expected to continue delivering 18-20 per cent growth as the Indian market’s share in total global pharma exports is still very low.

I believe that Indian equities continue to remain a compelling long-term story. Its growth potential remains strong and a recovery in the global economy would strength this further. Since the valuations are also not expensive and the prospects are improving, I would advise retail investors to buy into equities rather than trying to time the markets. The wait for returns is also unlikely to be much longer.