Time To Stay Focused

[INSERT_1]

“Prediction is very difficult, especially if it is about the future,” said Niels Bohr, Nobel laureate, 1922. The same goes for the current global rally. For people who have spent more than two decades – this is a long, flat, trading market. For the ones with a bit less, it is a W-shaped recovery and if one has been a favourite child of destiny to have witnessed only the post 2003-scenario – this is a V-shaped recovery. The current global rally might make the valuations look stretched across the board. However, in the medium term, with the amount of liquidity outside the system, this can keep the valuations stretched.

We believe that the developed countries stand a risk of reversal back to recession once the stimulus is done away with. Cars for clunkers will be an example and the car sale data of the next few months would testify this. However, there is a difference when we consider the Indian case: the Indian story rests on multiple concurrent advantages of local consumption, infrastructure development, along with a proven global offshore value proposition. Indian economy should grow at 6-6.5 per cent in the current year with Q4FY10 expected to be the best. A ten-year history of India suggests that the mean PER is about 16x. Right now, we are at about 1-sigma higher.

India offers wider participation, above average RoE and a policy story of a democracy – something that would always enable a premium over a longer term. However, sentiments in short term would be driven by issues like monsoon and fiscal deficit, along with sustenance of the recent revival witnessed in the base segments of the economy. The domestic revival is therefore a key to the monetary troika of interest rates, inflation, and currency. If the rupee holds its strength against the USD, things may not be so bad. While in the long run, India is best poised to deliver superior returns. One must not forget that the extent and the direction of this liquidity is a slave of external events and can turn on a click.[PAGE BREAK]

As far as fiscal deficit is concerned, we believe that the government can pass the interim stress test. There exists a trump in terms of measured release of national repertoires like mineral resources, spectrum, telecom licenses and discrete stake-sales in PSUs will further ease the burden on government borrowing. On the negative side, the developments on drought conditions might play a spoilsport. H2FY10 will be critical, as real demand growth would be visible. In the short term, the banking sector might witness issues on account of lower NIMs and higher market-to-market hit on the back of firm interest rates scenario. Going forward, the main trigger for the markets will be state level elections.

The speed and direction of reforms will decide the slant of the market. The monthly numbers on all economic parameters would not look bad either, given the low base effect that we would witness from 2HFY10. Sectors that might do well will be cement, media (it gives us a chance to play the cross-section of the consumption story), engineering and power distribution. My advice to retail customers is to stay focused and study each of these before you commit money, Do your 10-minute due diligence before you commit and use the dips to buy with a 2-3 year perspective.