Time For Some Bullishness

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In the second quarter all the three sectors of the GDP performed well – agriculture with 2.8 per cent has turned up on the back of a good rabi crop of the last season, services with 9.7 per cent has emerged out of the slowdown to register close to double digit growth, and industry growth has remained a satisfactory 10.3 per cent despite deceleration during the quarter. The monsoon has been good and it’s best for domestic consumption, apart from playing a part in moderating the inflation levels and bringing down the overall interest rates in the coming months.

The Direct Taxes Code (DTC) Bill which was introduced in the parliament retains most of the provisions of the previous code. All this leads me to be very bullish. This is primarily due to the very strong domestic macro factors plus the international factors. Speaking about the international factors, the bullishness comes on the back of what Ben Shalom Bernanke had to say in his speech at the Fed’s Jackson Hole retreat. He admitted that the “incoming data suggests that the recovery has slowed in recent months”. The US economy grew much slower at an annualised 1.6 per cent in the second quarter than what was forecasted by experts earlier. Yet, the Fed Chairman insisted that all the pre-conditions are in place for a more vigorous recovery, which should be here by the next year. Of course, if that doesn’t happen, the FOMC “is prepared to provide additional monetary accommodation, especially if the outlook were to deteriorate significantly”. He is willing to discuss all the central bank’s options for introducing further policy stimulus, but he doesn’t seem entirely convinced that they would necessarily be effective.

The borrowing costs in credit markets are not a problem as during the crisis the mortgage rates are already at record lows. Another stimulus will further debase the US dollar but the US will not let consumption slacken. In my opinion there is not going to be a double dip. The above implies that the emerging markets will see robust inflows through the dollar carry trade. India will stand to benefit. The INR will appreciate and we are also staring at a very strong asset inflation coming up. With the cheap cost of money in the world system and a clear disconnect between the physical market for commodities based on demand and supply and the paper (futures) market for these commodities, I would not be surprised to find the global commodities beginning to rise again. Going forward, for the Indian markets, the contrarian sectors are where there is a maximum money-making opportunity. In the consumer staples and discretionary space, most of the stocks appear to be overvalued on an FY12 basis.

The key risk is about going wrong on earnings per se – there is definitely no case for a P/E expansion in these sectors. If someone believes that a temporary flattening of the yield curve would boost consumption in India, I surely don’t think that’s going to be the case. With fairly high inflation surely there is a case for cutting back on consumption rather than increasing it. Nonetheless, certain sectors in the consumption space which have been overlooked so far, and which could become interesting themes, are those of media and entertainment, DTH operations, and travel & tourism.