Gimme some hope!
Now that the euphoria over “Reforms” unleashed by the
government after the incumbent FM took over last summer has yielded the way to
“Reality” and the market expectations have been mostly aborted, we find it
pertinent to find reasons to stay invested in Indian equities. The task is not
easy, especially when you are standing at the precipice staring down at the
abyss that lies ahead.
As highlighted in the yesterday’s issue of Morning Trekk, we
do not see much reason to increase allocation towards Indian equities at this
point in time. Nevertheless, the incorrigible optimist in us believe that the
current economic phase will not lead to a structural collapse of “India Story”,
and the next 5years will see Indian economy’s potential growth rate improving
from the current 6-7% to 8-9%. Which essentially implies that over next 5years
Indian equities might provide decent returns to investors.
Remember, the five year period between 2008-12 the benchmark
indices have given negative (-)4% nominal return in absolute terms. Taking the
impact of inflation and dividends, the return would be (-)30% negative.
In this background we tried to work out the best and worst
case for Indian equities in next couple of years.
The best case
The best case for Indian equities in next two years would be
that:
(a)
The global economy stabilizes, especially US and
China, leading to improvement in external demand environment;
(b)
the benign liquidity conditions continue to
prevail at least till end 2014, keeping the rates low so that investors keep
chasing that extra few bps of yield thus sustaining the flows to India;
(c)
the next general election in India produce a
truly coalition governments where the constituents genuinely agree on a common
minimum program and such CMP is implemented in right earnest.
The key risk in this scenario could be sharp rise in global
commodity prices, especially energy that would strain the macro fundamentals of
Indian economy further.
In this scenario, we could have a repeat of 1998-1999, where
a large but selective market rally occurred in new economy stocks, following a
global trend.
It is however critical to note that such a rally would be
very selective and fizzle out as the valuations of selective sectors become
excessive soon.
In this case the exporters, especially IT services and large
unleveraged pharma companies could gain substantially. The austerity drive in
US and EU may also support more outsourcing of public services to cheaper labor
and demand for cheaper pharmaceutical products produced in India.
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