New Peak In Next Fiscal

The emerging markets have clearly outperformed all the other markets and have been on the top of all the asset classes to yield higher returns compared to others in the last one year.

Talking about India, the fund flow from the FIIs has been on the positive side other than the month of May. From this we can derive that the focus of FIIs has got stronger and that they are buying the India growth story. The Indian markets are high beta markets and we believe that the scenario is likely to remain so as compared to the others. We feel that the fundamentals of the Indian markets are not available any place else, which include economic growth, GDP growth and the kind of consumption story we are presently living in. All this collectively makes India emerge a clear winner.

Historically, India has not traded less than a price to earnings ratio (P/E) of 8x from which we have moved to above 27x and witnessed a bubble at that point of time. We are currently trading at a P/E of close to 18x. I will be very much comfortable with a P/E below 20x as the upside potential at that point will be much higher. If you are buying at a P/E of 22-23x then the upside potential will be capped and at that point one has to understand the risk associated with it and the expected rewards. To add to this, I must say that the India growth story is intact. The growth measures that India has taken in 1990s have given the country the much-needed leap and there has been a paradigm shift in the country from that point onwards. The FIIs have been playing an active role since 2003 and they continue to be the main contributors for any type of movement that is taking place in the markets. I feel that India has still not reached that level of maturity when it can sustain itself by mainly depending on the domestic flows. In India we are presently passing through a phase of higher inflation with food prices touching new highs. This may be because of the supply side economics of last year caused due to the monsoon season being below the average. However, this year the rainfall is expected to be on the normal side and we may see inflation coming down in the current year. Meanwhile, fiscal deficit is another important aspect to be taken into consideration. At present I am quite comfortable about this issue as we have seen in the recent past that the government has raised nearly one lakh crore rupees from the recently concluded 3G and BWA auctions. Going forward, I feel that the fiscal deficit will be in control and will be taken care of in a well-planned manner.

Putting the year 2011 into perspective, we feel that the markets might peak in the next fiscal. But we are keeping our focus on the infrastructure play in India and are bullish about the sector as a whole. At present, we are bullish about certain sectors such as banking, infrastructure and pharmaceuticals. Stocks like L&T, IVRCL Infra, Cipla, Aurobindo Pharma may witness good movement going forward. Our suggestion to retail investors is to park their funds in good fundamental stocks. They should also look at the risk reward ratio while doing so.