Go Slow And Steady

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The Indian capital markets have underperformed the MSCI-world and MSCI-EM indices by more than 10 per cent. However, it does not mean that we may continue to do so. There are many reasons for this thought process of ours. Multiple government agencies are expecting an 8.5 per cent-plus GDP growth for the next year. Moreover, backed by a disciplined government’s fiscal act, growth in government’s revenues, 15 per cent+ earnings’ growth for India Inc, domes-tic consumption growth, and recovery in the economy are some other factors which we feel will ensure that the Indian capital markets put up a much better performance in 2H of CY11.
However, galloping inflation and consistently high crude oil prices could act as spoilsport factors. Given that the negatives do not manifest themselves in a big way, the markets are poised to touch a new high in the current year and we expect them to yield more than 15 per cent returns on a YoY basis. India Inc’s Q3 performance can be summed up as ‘strong topline growth but margins under pressure’. The sales growth was a robust 19 per cent+ which clearly shows that the demand side story is intact while the cost push has taken its toll on the margins. Ten out of the 16 dominant sectors saw a contraction in the margins.
Meanwhile, banks and sectors such as IT and energy held their ground in terms of margins, thus giving some glimmer of hope for the days to come. The earning growth (EPS) estimates for the Sensex has been toned down by most of the analysts for FY12 to the 1,260-70 range. Most of the analysts on the street expect the earnings to grow at 15 per cent+. This would impact the multiples being offered to the market and expecting a PEG of 1 the market multiple may contract (and revert to the mean) to a multiple of 15 to 16 times. A reasonable / manageable inflation rate, a moderate fiscal deficit, political will to push reforms, crude oil prices mellowing down, stability in Arab nations, investments being channelised to correct the supply side structural imbalances, an average to above average monsoon are some of the triggers which could have a positive impact.
Dual inflationary pressure in terms of higher food prices and rising petro product prices will continue to push inflationary tendencies in the economy northwards. The expected inflation in the economy would be higher than the RBI’s comfort zone of 4 to 5.5 per cent. We expect it to hover in the range of 7 to 7.5 per cent in the first half of the year and then mellow down towards a range of 5 to 6 per cent for the second half. Inflationary tendencies are also adversely affected by global inflationary pressures and we would import a lot of this inflation from the rest of the world.  For the first time after many months, in the second fortnight of Jan 2011, we saw deposits outgrowing the credit offtake in the banking system. Although this is a good sign towards the easing of liquidity in the system, it comes at a higher cost. We believe that the interest rate has to go up by 75 to 125 bps by the year end. We are bullish on pharma, banking and IT. My advice to retail investors would be to remain vigilant and alert in these times of high volatility. They should not try to time the market but invest in a systematic manner over a longer period of time to get the benefit of compounding.