Slow And Steady Wins The Race

The Indian equities outperformed from April/May 2009 to about October/November 2010 but post-Diwali the domestic issues, particularly the scams and the fall-out of the same, punctured the rally and wiped the froth away. We are now in a consolidation mode and expect the markets to be range-bound with a negative bias because of international concerns such as the Korean skirmishes, Euro Zone, oil prices as well as the various political issues, rising interest rates, and inflation on the domestic front. All this is going to keep the markets under pressure. The next big upward movement can be expected from the second half of 2011 as by then the current set of negative cues would have been discounted. The Q1F12 results should show an up-tick. The relative out-performance of the Indian economy vis-a-vis its peers would again start attracting the investors.

We have a year-end Sensex target at around 24,000 and Nifty at the 7,000 level but this could just be the beginning of a multi-year bull run. We believe that this could also turn out to be the ‘golden decade’ for India. We are positive on a few sectors that are showing signs of good growth prospects coupled with reasonable valuations such as infrastructure, capital goods, pharmaceuticals, and FMCG. Infrastructure has been ignored since the last 18 months but this could be the theme for the ensuing year. We also expect banking & financials to remain in the limelight and this could be about 10-12 per cent lower.

Automobiles had a dream run backed by robust demand. A correction of about 15-18 per cent would provide a good opportunity to buy into this sector. Although the Indian economy has been resilient so far, the key issue now is about how to sustain this momentum in the face of a tight domestic liquidity situation, resulting in high cost of funding and building inflationary pressures due to higher crude and commodity prices. On the global front, we expect further quantitative easing which could improve consumer spending and sentiments, though in the near term the focus would remain on the escalating tensions between North and South Korea. The Euro Zone issue and the fear of a double-dip in the US could turn out to be the proverbial ‘Damocles Sword’.

Retail investors need to be very cautious and selective in their investments. Tips don’t create wealth. Instead they have the potential to destroy it. A strategy that may work for retail investors now is to accumulate quality stocks with proven management at reasonable valuations using the present consolidation phase to their advantage. A number of good quality mid-cap stocks post the recent crack are worth looking at. Avoid operator-linked stocks due to the steep fall in some of them. Remember that only quality stocks can provide sustainable long-term returns. In the given market scenario it would be prudent to stagger one’s purchases to take advantage of any short/medium-term corrections. Clear objectives and patience will help in the long run.