Revival In The Offing

-By P K Agarwal
The Indian stock market seems to have bottomed out and has been consolidating in the range of 2,500 to 3,200 Nifty for the past three months after a severe fall from the level of 6,357 in January 2008. The markets are expected to move within this range for some more time before staging a breakout. Having said so, the outlook is rather dismal and it is now an accepted fact that the year 2009 will see developed economies going through contraction. In fact, the United Kingdom has officially announced that the British economy is in recession. However, a major part of the impact has already been factored in. 

With multi-billion dollar bailout packages and necessary policy initiatives (like lowering of benchmark interest rates) almost all governments and central banks are striving hard to contain the damage and revive the economies. The year will be more like gradual improvement than further deterioration in the situation for emerging economies like India and China. Come mid-2009, when Barack Obama’s regime will start flourishing, we may see some satisfactory moments. More so, because the US government’s initiation of announcing a bailout package of $819 billion will help economies dependent on the US leave a sigh of relief.

Most of the impact of the global meltdown on Indian economy will be indirect. For example, Indian companies, particularly the leading IT companies, have indicated that the clients in US are now interested in business transformation support as compared to simple back office work. Also, in the year 2009 we cannot expect large capital inflows from the US as most of the big investors are still not out of the woods and are ‘risk averse’. They are therefore not likely to consider large investments in emerging markets. In such a scenario, sectors such as banking, financial services, power and energy, housing, FMCG and telecom will perform better in the early stage of the recovery. The reason is that most of these sectors are completely focused on domestic consumption.

Given the demographics of India, our domestic demand is still strong and all we need is a revival of the growth cycle once again. Inflation is expected to be around 3 per cent by March 2009 and the RBI certainly has headroom to further cut policy rates by 100 basis points. 

The growth story continues for tele-com with a record number of subscrib-ers being added every month. Power in India continues to be in short supply and we still face a 15-20 per cent peak level deficit. Recently, the government has announced an improved rate of return of 15.5 per cent (as compared to 14 per cent in the past) for the power producers. This will speed up new capacity in the power sector and increase the profits of the existing play-ers. As far as FMCG, housing and auto sectors are concerned, they could also show improved performances due to a huge latent demand for these products. 

Most of the triggers in the macro-economic environment to start a sus-tainable rally are now appearing on the scene. Some of the important ones are low inflation, low interest rates, low fuel prices and supportive government poli-cies. Therefore, one should not panic and sell out at these low levels. Instead, one can use this opportunity to build a solid portfolio by concentrating on the large-caps in the sectors suggested earlier. Buy gradually on dips with 2-3 years’ time horizon and do not clutter your portfolio with too many scrips.