Hold your fishing rods
As suggested in some of our recent posts, we continue to believe
that Indian economy and therefore the equity market may hit the rock sometime
later this year. We may see a gradual recovery over 2014 and some acceleration
in 2015.
The down leg of the economy in next six months would likely be
led by fiscal tightening, fall in household consumption and savings, and
deferment of investment plans.
Rise in consumer prices especially energy, election in key
states followed by general election, still high fiscal and trade gap and fall
in external demand due to fiscal tightening in US and EU, are some of the key
factors that may support the downtrend.
Historically, the market has reflected the bottom in distress.
Sale of core assets by the stressed corporates (already happening), large scale
debt restructuring (we need to see some substantial write offs rather than
cosmetic maturity extension), and capital restructuring to cleanse the balance
sheets usually mark the completion of the process. Banks and the stressed
sectors (infra, realty and power in current case), are invariably pushed to the
wall.
We therefore see a repeat of 1998-99 in the markets, where the
recovery will be led by the global economy and the companies that directly
benefit from the global demand, especially US and Japan. We therefore OW IT and
large pharma and suggest substantial UW on banks and stressed sectors. A normal
monsoon and estimated US$10-12bn spending on elections in next 15months may
support consumption demand, especially auto and staples.
Strategy
(a)
Over next 6months gradually increase the weight
of equity in asset allocation.
(b)
Overweight exporters, especially IT and global
pharma. Select auto and consumer staples may also be added.
(c)
Select financials may be considered at
appropriate price points.
(d)
Keep a close watch on the stressed companies
which have good assets. The completion of three phase restructuring as
suggested above would definitely provide a decent investment opportunity in
this sector.
(e)
Some of the stock worth considering are:
IT and ITeS (OW): TCS, Mahindra Satyam, Hexaware,
HCL Tech, Mind Tree, Polaris
Consumption (EW): M&M, HUL, Dabur, Havells,
Exide
Pharma (OW): Dr Reddy, Sun Pharma, Glenmark, Lupin
Financials (Review): ICICI, Yes Bank, L&T
Finance, M&M Finance, Manappuram.
Commodities (Review): Ambuja Cement, Ultra Tech,
Tata Steel and Hindalco.
Stressed Companies (Review): GVK Power, NCC,
IVRCL, JPA,
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