Many equity markets world over (with the notable exception of
China) have mostly recouped their losses of past five years. The same however
cannot be said about the macroeconomic data. In fact there are little signs,
despite near zero interest rates and persistently low inflation in developed
economies, of economic growth stabilizing even at lowest levels or employment
conditions improving in any helpful measure.
This is leading many, including InvesTrekk, to believe that the extant equity
rally may be purely technical and hence should not be considered as beginning
of a secular bull market. In exclusive Indian context, the rally has certainly
outpaced macroeconomic and corporate fundamentals and valuations in select
pockets are already flirting with bubble like conditions.
A normal monsoon, complete government post next general
elections (hopefully!), lower rate, benign consumer prices and massive election
spend may support higher consumption demand and hence justify expensive consumer
sector valuations. Passenger vehicle may also gain. But many pharma, banking
and metal companies would need to correct over 25% to deserve an investment
consideration.
Second tier IT could be one suitable shelter given their
strong balance sheets, stable businesses and cheaper valuations. Though growth
there may still remain muted for another year or so, favorable resolution of US
VISA uncertainties may cause a rally there.
Similarly, the valuation gap between top 3 cement companies
and the rest is probably at historic high. A revival in infrastructure spending
next year post election aided by lower rates could be trigger there.
There is a strong buzz around PSU oil marketing companies
(OMCs). The cheap valuations relative to their replacement value is the primary
investment argument, duly supported by recent fuel pricing reforms. In our
view, these companies are worst examples of corporate governance. The majority
shareholder (government) has consistently and blatantly oppressed the minority
shareholders in these companies – by not allowing them to fix the prices of
their products, raise capital when required, make investments where and when
desirable and disallowing the managements to restructure their costs
(especially employee cost) during downturns. Moreover, there is no legal
guarantee that the current fuel pricing mechanism will continue for, say next
5years.
Insofar as the global rally is concerned, consider the
following three data points are worth considering:
1.
The most-indebted U.S. companies are rallying
more than any time in almost four years compared with the rest of the stock
market.
2.
China’s trade surplus is contested to be
one-tenth the official $61 billion reported so far this year after accounting
for fake transactions used to disguise hot-money inflows.
3. Imports of refined copper
by China, the biggest user, declined in April to the lowest level since June
2011, while exports fell for the first time in 8months.
No comments:
Post a Comment