Crouching Bull, Hidden Bear
Already affected by the rising inflation rate and the prices of crude oil, the market may take a long time to open up because of certain other major &ctors such as elections in May and rising interest rates
The key factors that the market has been reacting to clearly are inflation and the price of crude oil. In fact, what happens to crude will be the key in determining the shifts that will take place in the equity markets because investors are using equities as a hedge against the fall in crude oil prices. Also, commodity prices will be something that investors are likely to keep a watch on. There are expectations built around the kind of reforms that the government will usher in during the next six months and this might act as a trigger in the market.
It also depends on how well the government manages the current fiscal deficit scenario. But we expect that the supply of gas from the K G Basin might reduce the oil dependence factor and thereby tame the effect of rising crude oil prices on the country’s fiscal deficit. The market, as well as most of the foreign investors, will keep an eye on the elections scheduled to take place in May next year. There’s also a keen interest in what the RBI’s new governor will do about the interest rates over the next 3-4 months. These decisions will play an important role in determining how the market swings. In the next two or three quarters the growth momentum that companies are now displaying will taper off. Overall, we feel that the market may not witness a decisive upward move till the elections are over and it is quite possible that the market will move in the range of 4,000-4,500.
In the short term, there are other issues too which could affect the market but we don’t see a substantial downward trend because investors are aware of most these issues and most investors are factoring in the lower GDP growth and higher rate of inflation into their calculations. But in relative terms, India is much better poised than any of the other countries and therefore it’s only the liquidity equation of the market that is a cause for any concern. We expect the GDP numbers to be in the range of 7-7.5 per cent for this year and whatever tightening measures have been taken by the RBI will show an effect in the coming quarters. Thus we feel that the growth will taper off this year but the next year should be much better due to the Sixth Pay Commission which will drive the demand and help the scenario going forward.
The reforms theme will be more sector-specific rather than being a broad market theme. Sectors like insurance, banking, media should benefit in a major way from the reforms process. Meanwhile, reforms which have a larger implication on the masses like the retail sector and PSU divestment in the power and mining sector might face some kind of resistance. Apart from that, we are bullish on the mining equipment,
education and logistics sector. In the next one year, once the market situation goes through a turnaround, the incremental money from the Flis will first flow to the large-cap stocks. And then when the bullish phase is confirmed by a three-month sustained rally in the large-cap, we might see the mid-cap and small-cap segments do well too.
We believe that the crude prices are headed downwards and are expected to hover in the range of $ 80-100 per barrel due to the destruction in demand and slowdown which has been happening in the US and UK. And what we feel is that inflation at some point will cross 13 per cent this year and we also believe that there might be one more hike in the interest rates as the credit and the banks are growing healthily beyond the RBI’s comfort level. The interest rate sensitive sectors like auto, real estate and banking and capital intensive sectors like infrastructure and capital goods will get hit due to the rising interest rates.
The fund house follows the fusion of both top down and bottoms up approaches for asset allocation wherein the focus is on companies having good cash flows, management vision and corporate governance with good relative valuations and risk return ratio. As the long term story for India is still intact, investors can invest in the equities using the SIP route rather than doing lump sum investment for 2-3 years as an investment horizon.
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