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.
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.
