Be Cash Ready For The Best Investment Opportunity

Sonam Udasi
Senior Vice President 
Head-Research 
IDBI Capital

Currently, the Indian market is at cross-roads. On one hand, there is an opportunity on the election front of a new government in place and that it might give a certain sense of direction and vision for the next 5 years. Also, the fact that you might be at trough in terms of bad news and in terms of economic growth and things should improve over the next 2-3 years. On the other hand, the fact that US and Europe have started to improve also indicates that there will be less global money available, less global liquidity and you have to compete for that liquidity within emerging markets. So if you are not able to give a sense of better economic growth or better returns, then a lot of other emerging economies may get that share of flows. Our own sense is that for the Indian markets to go up, they will have to start indicating the best in growth which we think is at least 2 quarters away. This is because, we will get some clarity of the vision after elections as to where we want to go. If the election outcome is not as per expectation, that is another negative at least in the shorter term. We might change our view depending on what the global factors and  domestic factors do, whether economic growth has started to pick up or whether the street levels in the economy have started to come off and whether growth is starting to in-jump.

On the earnings front, most of the results that have come out so far have been sector specific. IT has been pretty good, it has reiterated during this month. Pharma has been decent and has been rewarded. On the other side, as expected BFSI (Banking and Financial Institutions) has not done well. They have not done well in the sense that, not only their top line NII growth is slipping and it is not as per mark but also their asset quality stress is continuing and there is no indication that it is stopping in this quarter. Like we have seen that ICICI has clearly indicated that the asset quality stress will continue over the next 2-3 quarters which is negative for the overall strength of the economy. So, there are pockets where investors are finding opportunities. We think that over the next one year, the theme that will continue to play out will be IT and in some portion Pharma. I think media sector will start to re-emerge as one of the preferred sectors for the FIIs, simply because if you want to play domestic, then you have to play all themes of consumption which are domestic oriented. To that extent, I think media will start to find a lot of M&A action and lot of investor interest after a better volatility.

Coming to the currency front, we continue to maintain that our own view on the rupee-dollar for December end remain between 64-65. It used to be 63-65 but now we have revised it to 64-66 range. This is the reason we are projecting IT and Pharma. Our view is simply on that basis, not because India is doing something wrong, it’s just that US is getting much stronger and therefore all emerging markets will need to adjust to that.

Talking about interest rates, our own sense is that interest rates are unlikely to come down in India for at least 1 year. RBI has indicated status quo for at least one or two quarters. There is a chance of a minor tightening but I don't think there exits’ a scope for at least one year for you to cut rates because, even if your economic environment starts to improve, if US improves much faster, they will start hiking their interest rates. The difference of attraction to investors, especially FII investors has to be continued and therefore your cost of funds to India will continue to be at elevated levels over the next one year.

On the triggers for the markets going forward, in our view, the biggest trigger would be of the GDP starting to come back. If GDP starts to showcase 5.5-6 per cent kind of growth, when IIP starts to show some sort of action in the economy then everything else will follow. People do not bother about who comes to power or who does not come to power because the cash-flow and P&L is being generated on the ground. The other trigger will be that, if a strong government comes to power in India and they give some rationale, then it’s all herd mentality. But for us, the big thing is if we can manage the GDP and keep the rupee-dollar somewhat manageable. If we can keep it within 64-65, I don't think that we need to worry too much. But it’s a big worry if it goes beyond that and cannot be controlled.

Our own sense on the developed markets is that they will be profit-taking. Most markets, whether Europe or US are at all time highs. Markets generally tend to go up on rumours and sell-off on rumours. The rumour was that Europe and US have become better, now it is the news. Therefore, people will start to re-evaluate if it makes sense and hence we think that the stock market performance for both these will not out-perform.

Among the sectors, IT is one thing we like extremely. We don't think that the valuations have reached to 25 and 30 and we should be worried about that. I think that the top tier companies are trading at 21-22 times forward earnings. We are bullish on IT and Pharma not only because there is a rupee-dollar tailment that we think will continue to be there but also we think that operationally as US and Europe improves, core growth for these companies will also be very good. And therefore not only your core business is growing because of operational reasons but you are also getting the rupee-dollar tailment. Similarly, for Pharma, domestic growth last year was very much negative because of new norms and strikes by some of the pharmacists. We think that because of the base of it, even the domestic numbers will start to become better from this financial year, FY 2015 onwards.

We would advice retail investors to be ready with the cash, opportunity will come and when it comes, figure out what you want. The market always gives an opportunity before the elections. Try and see if you can buy either good branded companies or good cash-flow companies with low debt. Observe what RoEs and RoCs like and then put your money in. In a rising tide, everything will go up, but essentially you should be trying to build a very strong portfolio, which sustains despite economic cycles.