Invest In Companies With Low Debt

• Global Scenario

The Japanese Prime Minister Abe’s election victory is reflecting well on the country’s equities. He is expected to continue with the ongoing liberalisation of the Japanese economy. The US markets are looking extremely positive as the macroeconomic factors there are also improving. A low number of jobless people, strong growth in the manufacturing IIP and strong growth in the job markets contribute to this improvement.

• Investing Right

The FMCG, pharma, IT and banking sectors are likely to do well. Sun Pharma, Lupin, TCS, Infosys, ICICI Bank, M&M, HUL and Reliance Industries can be bought from a medium to long-term perspective. Investors have to find companies with low debt and strong promoters. Metals, realty, heavy industries etc. should be avoided till the economy shows signs of revival. Stocks of Large-Cap companies can be bought at every decline in a phased manner.

A weakening rupee, declining Manufacturing PMI, contracting service sector, increasing bond yields, widening Current Account Deficit (CAD), and liquidity squeeze are the common characteristics of almost all emerging markets at the moment. A number of investment managers shifted parts of their exposure from emerging markets to the USA after its economic recovery. The market mood in India is cautiously optimistic despite weak macroeconomic fundamentals, all thanks to the decent June quarterly numbers of most companies, government’s policy initiatives and the inherent strength of India Inc.

A recent study shows that many corporate balance sheets are coloured with debt, and some are facing huge challenges in restructuring these, owing to high borrowing costs and a weak rupee. Companies with low debt and higher cash reserves are expected to perform well in the near future. The recent quarterly numbers of TCS, Infosys, IndusInd Bank, Kotak Mahindra Bank, DB Corp, Axis Bank, and HDFC are well above market expectations and other Large-Cap stocks are expected to perform moderately above market expectations. With this perspective, the FMCG, pharma, IT and banking sectors are likely to outperform in the future.

Inflation is currently a major concern; partly due to higher crude oil prices and somewhat due to food products shortage. But it is likely to subside in the forthcoming months with a strong monsoon, which may support higher agri-product output this year.

A higher CAD and a weak rupee are major concerns on the RBI’s plate. If the apex bank reduces interest rates, the rupee may fall further and the CAD will also expand. Interest rates are likely to decline in the medium term with a declining inflation and requests from the industry lobby, as high borrowing costs put pressure on Indian Inc. Short-term interest rates hike, however, cannot be ruled out.

Weakness in the rupee is partially due to a high CAD and higher inflation as also because of a strong US dollar. The government has undertaken various measures to contain the CAD, while the RBI and the SEBI are trying hard to contain volatility in the currency market. A major support level for the rupee is 60.60. A sustained RBI intervention is thus expected in order to disrupt the currency’s fall.

The government currently needs to focus on liberalising FDI polices, attracting FII investments, lowering the CAD, the speedy implementation of various pending infrastructure projects and deciphering additional infrastructure funding plans. In the meanwhile, the project withdrawals of POSCO and Arcellor Mittal are major concerns in the government’s policy matters.

Some global markets are trading at their peaks. The Japanese Prime Minister Abe’s election victory is reflecting well on the country’s equities as also the Asian markets. He is expected to continue with the ongoing liberalisation of the Japanese economy. The US markets are looking extremely positive and some quarterly results of global banks and fund houses have came out quite strong, as the macroeconomic factors there are also improving. A low number of jobless people, strong growth in the manufacturing IIP and strong growth in the job markets contribute to this improvement. The Euro zone countries and China are also taking a range of measures to achieve growth in the near term.

I am positive on the FMCG, pharma, IT and banking sectors. Sun Pharma, Lupin, TCS, Infosys, ICICI Bank, M&M, HUL and Reliance Industries can be bought from a medium to long-term perspective.

Investors have to find companies with low debt and strong promoters. Metals, realty, heavy industries etc. should be avoided till the economy shows signs of revival. Stocks of Large-Cap companies can be bought at every decline in a phased manner.