Hop On For A Long Ride

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The global rally has taken several investors and experts by surprise. Within a span of four to five months, stock markets have zoomed up, nearly doubling in some cases. While there are apprehensions on whether the rally is sustainable, one needs to understand the background behind it. The current rally had started mainly because of a concentrated effort by governments and central bankers across developed and developing economies. Additionally, valuation levels were near distress levels. This rally may continue given the fact that economic activity has started picking up although its pace may reduce with intermittent corrections.

We think that in the short term, especially till CY11, growth should be strong because of the base effect. However, over the long term, growth would be about 2 per cent for world GDP. And at around the 16,000 level we think that the Indian markets are reasonably valued. One also needs to bear in mind that we are in an earnings upgrade cycle. If earnings’ growth remains above 20 per cent in FY11 as predicted by consensus, the market may re-rate. In this scenario we could actually see the markets achieving new peaks. Secondly, a higher fiscal deficit is not limited to India. As you would agree, high fiscal deficit is actually a global phenomenon in the current period of economic downturn, as governments the world over try to push their sagging economies back on to the growth path.

As regards the financial performance of India Inc., our belief is that the current quarter should be a better quarter compared to Q1 if one were to compare it on an aggregate basis. We think that FY10 could be the year of consolidation in earnings. While, we believe that the domestic consumption-related sectors will report strong earnings. On the other hand, sectors which primarily display a global cyclical pattern would lag behind in terms of performance. And we further feel that the markets would be viewing the GDP upgrades and earnings upgrade from here on. Apart from this, global liquidity will also be an important driving factor as far as the markets are concerned. With regards to the sectors, we think a good balance between sectors benefiting from global recovery like IT, global cyclical and sectors benefiting from domestic capital expenditure and consumption will do well over medium to long term.

At this point in time, I would suggest that one should consider investing in riskier assets like equities.
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This is because recent data patterns point towards a recovery in the global economy which will definitely help assets classes like equity to deliver superior returns. However, one should also allocate some money to silver and gold for hedging purpose. We believe that in the near term the mid-cap segment will out-perform large-caps as risk aversion trade is over and fear that smaller companies will find it difficult to survive in absence of credit availability and lower demand. On an average, mid-cap was trading at a 50 per cent discount to large-cap at the end of Q1FY10. We have increased exposure to mid-cap to capture this anomaly.

I would advice retail investors to consider investing from a long-term perspective and not get too bogged down with day-to-day market ups and downs. Investors should focus on building a balanced portfolio with exposure to different asset classes, the degree of weightage to each asset class would obviously depend on the risk-taking ability of the investor. More importantly, they should focus on the quality of management, earnings and cash flow. The most important point to remember is that value investing will surely pay well in the medium to long term.