Wednesday, December 4, 2013

Investment strategy

Thought for the day
“All you need is ignorance and confidence and the success is sure.”
Mark Twain (American, (1835-1910)
Word of the day
Twain (adj)
Two.
(Source: Dictionary.com)
Shri Nārada Uvāca
Why the Mint Street is not celebrating the victories over current account and fiscal deficits?
Is Dalal Street missing something which Mint Street could see clearly?

Investment strategy

The rays of optimism emanating from slight stabilization in macro fundamentals and above expectation 2QFY14 corporate performance has attracted foreign investors’ interest in Indian equities; though the domestic investors have mostly remained on the sidelines.
Despite low participation and late rise in volatility, Indian equities have been rather resilient. Nifty has averaged ~5900 in YTD 2013, much higher than 2010 (5468), 2011 (5352) and 2012 (5363). The collective wisdom of the market therefore appears to be much more sanguine about the economic conditions, and therefore corporate performance. Off late sell side analysts have also changed their stance to neutral with a mild positive bias.
From here on, in our view, the upside triggers would mostly be domestic, e.g., improvement in macro fundamentals, improved political environment post 2014 election, inflation peaking out next year on high base effect, peaking of rates, improvement in external trade, and pick up in investment cycle.
The earnings profile of large corporates with geographically diversified global business profile could help aggregate earnings numbers to show a better picture from 2HFY15. Though, mid and small enterprise should continue to struggle and post poor performance. The financials therefore would continue to experience deterioration in asset quality.
The 15-20% higher index levels will thus mostly be a consequence of 15-20% higher earnings .over FY14-FY16 rather than any multiple expansion. The multiple on the contrary might see some contraction at aggregate level. However, we may see some multiple expansion in capital goods, infra and financials while multiple of defensives contract a bit.
The caution here is that given the deposit rates persisting at high level due to savings deficit the domestic participation in equities is not likely to rise in any substantial manner. Moreover, the foreign participation in Indian equities has so far been mostly generic (EM) rather than Country specific. We do not see how the prospects of Nifty rising 15-20% would motivate foreign investors to specifically invest in “Indian equities” in a major way, as in all likelihood the currency will remain under pressure, rates will likely peak at elevate level and other EMs will likely outperform India should US and EU economies stablize.
The rise in domestic participation and return of EM generally in favor is therefore the key to the bull case for the market.
The downside risk to the market would mostly be due to external factors. Historically, large FII flows in a short period of time have caused huge volatility in Indian equity markets. A reversal of USD carry trade, if and when US Fed decides to moderate liquidity conditions in US, will certainly cause this event.
Though in our view, the liquidity moderation would not be disruptive to the global economy, in the short term it will certainly lead to global rise in cost of capital and weakening of currencies with higher CAD, like INR.
Under these circumstances, it would therefore be appropriate to focus on businesses that have (a) low beta to domestic macro fundamentals; (b) would not be materially impacted by global liquidity event and consequent rise in cost of capital and (c) would benefit from stable external demand environment.

No comments:

Post a Comment