I would once again re-iterate that India is in the middle of an unprecedented bull market and the riskreward trade-off for investing in the Indian market remains positive. Investors, therefore, should not get disturbed by the momentary blips, be they local or global, including the deficient monsoons or disruptions in the functioning of parliament due to Vyapam and Lalit Modi scams or the Greece issue and Fed rate hikes. Any correction should in fact be used to add good stocks whose valuations have been beaten down due to temporary reasons or sentimental play based on the ‘buy on declines’ philosophy. However, investors need to watch the current parliament session and progress made in passage of key Bills, June quarter corporate results, progress of the monsoon and RBI’s decision about rate cuts in coming monetary policy reviews.
The economy is showing distinct signs of improvement despite exports slowing down and domestic demand not picking up. The manufacturing activity has improved and stalled projects have significantly declined with new investment projects getting started. The commodity slump has led to significant decline in CAD and inflation resulting in improving gross margins for the corporates. The NPAs of the banking sector still remain a major area of concern. However, the better-than-expected monsoon is likely to improve sentiment further. The country’s growth opportunities, robustness of the private sector, strong services sector, consumption growth and demography make it different from its peers. But the recovery is likely to be gradual and uneven because of the highly leveraged private sector and capex being slow.
Another welcome development for the market is the increasing retail participation both directly and through the mutual fund route, caused more by depressed real estate and falling gold prices. With regulation and demographics being more favourable for investors that are less risk averse, Morgan predicts huge domestic flows into the equity markets in the next 10 years. Retail investors are buying mainly on the premise that the government is pushing structural reforms that will benefit the economy in the long run.
However, there may be a pull-back in the market in the short term. On the global front, economic troubles in China and higher interest rates in US can cast their shadow over emerging markets. GDP numbers may not be supported by earnings growth that the corporate sector may post for the June quarter. But easing of raw material prices may give relief, allowing companies to post better margins though with a modest top line growth.
Investors are, therefore, advised to sit tight on to their holdings. They can at best get rid of weak stocks that have run up purely on sentiment and replace them with stocks of fundamentally good companies or themes that are going to play out in the near future.
Vol. 9, Issue 5 | August 2015