Positives Continue For The Market

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Let us take stock of both the negatives and the positives for the market. The negatives that have kept the markets in check are: (1) persistently high inflation (2) expectations of monetary tightening (3) discomfort on the fiscal deficit front (4) a disappointing monsoon so far and (5) the weak global financial situation. While it is true that many of these issues will not go away in a hurry, there are indications that some of them are passing through a correctional mode.

On the inflation front, there are signs that food inflation is easing. While the May inflation numbers were still worrisome, the inflation should trend down over the next few months on account of the base effect. The fiscal deficit concerns have also abated a little.  With the recent success of the 3G auctions, the government’s borrowing programme is expected to reduce by around Rs 1,00,000 crore. Given that the developed world continues to follow a loose fiscal policy and the RBI expects inflation to show some signs of easing, the premier bank is expected to take baby steps as far as hiking the interest rates are concerned. While it is too early to predict if the monsoon will be below normal, the markets are not yet factoring in a bad monsoon.

The stress tests conducted for the European banks indicate that the number of European banks that would need fresh capital infusion is much less than expected. Asia, including India, is increasingly seen to be decoupled from the developed markets. The positives for the market continue to reinforce themselves. The growth outlook for India remains positive. Considering that the global economic growth rate is expected to be extremely anemic, the India growth story, in comparison, is outstanding. Industrial production growth for May at 11.5 per cent and for April at 16.5 per cent has been robust. In April, the capital goods sector grew by 73 per cent – the highest in the last 20 years. Growth in the capital goods sector signals that the economy should be in line for a healthy GDP growth.  Strong credit growth is another signal that the economy is on a rebound. GDP growth for 2011 should be upwards of 8 per cent. The government has surprised the markets with its renewed thrust on reforms. The government seems to making good progress on the fronts of fuel price decontrol, GST and the direct tax code. We can expect significant progress in terms of the financial sector reforms too in the near future. The strong earnings’ momentum continues.[PAGE BREAK]

The sectors that should continue to outperform are those that are sustained by the strong domestic demand. These would include, among others, automobiles, pharmaceuticals and FMCG. The technology sector also seems to be turning towards better days with the global IT spending showing a definite pickup. Sectors that will be positively impacted on account of the renewed thrust on reforms include oil & gas and finance.