Waiting For Global Cues

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Lead indicators across the globe have now been referring to an economic recovery. However, a large part of such improved data is due to a huge inventory build-up that has taken place in the recent past. Since the corporate balance sheets have improved significantly on account of financial restructuring, cost rationalisation and lower commodity prices, they have built up this huge inventory based on the expectation that the end demand will pick up at some point of time. But one must  understand here that the US and other major European countries, which account for more than three-fifth of global consumption, are still undergoing major economic adjustments right from their saving to spending habits.

Therefore, unless the demand peaks significantly in these parts of the world, the inventories might be of no use. This imbalance between demand and supply may lead to some sort of corrections in the global equity market in the days to come. Therefore, we will intently watch the data pertaining to unemployment and consumer confidence, particularly in the US and the Euro Zone to gauge whether, going forward, it will be a ‘V’ or a ‘W’. However, in terms of relative growth prospects and demographic advantages, India will command a premium. The Indian market underperformed global equity in the last three months and this suggests that monsoon discounting is behind us.

It is believed that in the near future the Indian market will broadly follow the global cues. Studied from a long-term perspective, we are extremely positive about the Indian markets. The huge fiscal deficit is nothing new. But more than the fact that fiscal deficit will pose a threat to the sovereign rating and overall interest rates in the economy, I am concerned about the reasons behind the overshooting of expenditure as com-pared to last year. Almost half of the Rs 1.2 trillion of excess expenditure in the current fiscal is on account of debt servicing and defence outlay, hardly leaving any room for excess expenditure on  power, infrastructure or any other productive purposes that can induce future GDP growth.

Therefore, in absence of a strong message on account of reform commitments, fiscal prudence and a clear disinvestment programme, we may see a marginal downgrading of India’s premium. From the bond perspective, I am of the view that the yield is only going to rise from its current level. However, the degree of such firming up of the yield will depend on two factors: one, how soon the RBI starts withdrawing the accommodative monetary policy to combat the inflation threat and two, how soon the capex cycle turns in a big way. If you study the stock movements over the last three months, you will notice hugely divergent stock price movements all across the large-cap, mid-cap and small-cap stocks.
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This means that some sort of over-expectation is getting built into some specific stocks and we may witness some disappointments on those counters. However, we do not think that Q2 numbers will act as a major trigger for the market. The trigger will instead come from global cues. A major event will be the starting of withdrawal of the accommodative monetary policy by any one of the major central banks. Taking the sectoral view, we are largely bullish on infrastructure, power, banking and IT.  We think that these are the best sectors to play the India story on a long-term basis. In fact, long-term fundamentals have nothing to do with short-term volatility in an equity market. We will stay overweight on fundamentally strong stocks. Thus my advice to retail investors is that they should not try to time the market but buy on the fundamental strengths of any company.