Out of Woods

[INSERT_1]

The revival as seen in the markets in the year 2009 was backed by the fast recovery in economic growth. The economic numbers and the corporate profit figures emerging worldwide have been very positive and this is a clear indication of the process of recovery gaining steam. In India, on a specific level, the results’ season has been progressing well and the growth outlook across industries has been picking up. The same is the case with results across other emerging and developed economies. As such, the growth pattern in India looks sustainable with consumption growth likely to remain strong due to improving earnings.

The improving economic growth numbers, combined with investor psychology which is still skeptical of the rally in the markets, will support the markets. The worst case seems to be a further 3-5 per cent downside. The current correction could be the last major opportunity for investment in the markets which should target new highs over the later part of the year. Financials, automobile and capital goods’ stocks should outperform the markets going forward. The auto sector demand should remain strong due to improving income levels and easy credit availability. Capital goods that have been a laggard sector over the last 12 months mainly due to the fact that the upward movement in the sector happens with a lag of 12 to 18 months after the cycle bottoming out, should now be outperforming with improving implementation and good order book flow.

Every bull market will find reasons to correct and every bull market will have sell-offs. However, these sell-offs get taken out very fast and are never long-lasting. The last bull market of 2003-07 had several of them as in May 2004, May 2006, February 2007 etc. At around the same time in year 2004 the Sensex was at the level of 5,700 and the Sensex EPS was around 350, there-by providing a P/E of around 16.5X. The current P/E is around 5-7 per cent higher but it is also important to note that 2004 was the time when most investors were unsure of growth. Today we are sure of an 8 per cent growth rate, if not 9 per cent. Therefore, looking at the P/E ratios to make a judgment about the future market direction is likely to be a futile exercise.

As concerns about the Euro subside over the next few days the markets will again start focusing on the fundamentals. For the Indian markets a steadily declining inflation and the monsoon season will be the triggers to look out for in the short run. My advice is not to listen to the market pundits who change their views every few days but to concentrate on the long run. Pick out the right kind of stocks to make money over a longer time frame. The future is bright and the outlook is strong. My outlook on the markets is that we should see a level of 35,000 to 37,000 on the BSE Sensex over the next three years. As such, any correction is an opportunity to buy. Retail investors should keep on increasing allocation to equities on every correction.