Diversify Your Investments

The Indian equity markets are touching new highs supported mainly by robust FII investments. On the domestic front, there are a number of key positives shaping up such as narrowed current account deficit as-well-as healthy capital inflows, reining in of the fiscal deficit, bottoming out of GDP growth, likely boost to investments post the general elections and easing food inflation, which can bring respite from elevated interest rates in the economy. Owing to these factors, in my view, Indian equities seem considerably better placed as compared to other EMs in the scenario of gradual tapering of global liquidity.

On the earning front, during 3QFY14, IT companies largely delivered an in line set of numbers with decent volume growth in view of a seasonally soft quarter for the sector and pharma companies have reported a good set of results. For the automobile sector, it was a mixed quarter with forex movement being favourable for auto players. In the banking sector, asset quality pressures remained high owing to the weak macroeconomic environment. In my view, a material improvement in the asset quality situation rests on revival of growth in the economy. So far, defensive and export sectors have continued to hold EPS growth in the positive territory, but in my view, going forward FY2015 is likely to be a much stronger year for earnings growth as the cyclical sectors will come back with a bang.

The macroeconomic fundamentals are on an improving trajectory and our current account deficit for FY2014 is expected to narrow substantially to a comfortable level of about 2 per cent of GDP from 4.8 per cent of GDP in FY2013. On the back of these improvements, coupled with strong capital inflows, the INR has gained by about 1.7 per cent since the beginning of January 2014. Going forward, I believe that provided these positives and a strong mandate for the new government shapes up, then the INR is likely to follow suit and maintain a reasonably positive bias vis-à-vis the dollar i.e it may not appreciate too much from these levels but any sharp depreciation in the near-term also seems unlikely.

The headline CPI inflation has positively moderated for the third straight month and came in at 8.1 per cent during February 2014 as compared to 8.8 per cent in January 2014, largely owing to the deceleration in food inflation. But, presently the markets are expecting the RBI to maintain status quo on policy rates in its April policy review. In my view, going ahead in case headline CPI inflation prints trend sustainably lower than the 8 per cent-level, the RBI is likely to take a more growth-supportive stance and bring down interest rates in the economy.

The markets are hoping for a strong show by the BJP-led NDA in the general elections owing to their pro-development and reform agenda. In case that happens, over the coming six months, then I believe that market momentum would strengthen benefiting stocks in cyclical sectors. I believe that once we are through with the general elections, greater policy certainty is likely to drive announcement of new projects and revival in the investment cycle would aid in invigorating GDP growth.

On the global front, markets have already factored in a gradual exit from the Federal Reserve’s QE3 during the course of the year. In the advanced economies, concerted efforts by policymakers have resulted in growth recovery taking a stronger hold. In fact, from a medium-term perspective, I believe that revival of growth in the advanced economies is positive for our economy as that would likely benefit our export performance and boost GDP growth. So, market corrections may be used as an opportunity to buy.

I continue to remain positive on the outlook for export-oriented sectors particularly IT and pharmaceuticals. In light of positive cyclical factors shaping up, I also selectively prefer large private banks, as these continue to remain structurally strong and are likely to benefit from an imminent economic recovery. In addition, some of the cyclical sectors such as capital goods, quality infrastructure plays and automobiles are also likely to be favourable for investors once the recovery sets in.

It is only recently that markets have finally made a new high after a long wait of 5-6 years. The recent rally has largely been driven by renewed interest by FII investors in Indian equity markets. But I am optimistic that retail investors will return to markets in greater volumes in the coming months. And the good news is that so far the rally has been quite narrow in only few select stocks, and a large portion of the markets is still ripe for investing. So the time is right for investors to start increasing their exposure to equities as this rally has just begun and has a significant DS way to go.