JOIN USThe outlook for Indian equities has improved considerably since the past year on the back of positive global triggers including benign global liquidity and domestic policy action. Owing to this improvement in sentiment, the Sensex has given about 24 per cent returns in the last one year. The benchmark index is just 5 per cent away from its all-time high. At these levels, I believe it is not surprising for the markets to consolidate. In fact, I believe that markets are awaiting further triggers that would in turn determine market direction.
Presently, global markets are watching out for cues from the Federal Reserve regarding its quantitative easing programme. Typically, we have seen risk-on and risk-off phases in the past few years due to lingering concerns in the global economy. But policy makers have consistently taken mature decisions and in turn preserved financial stability. So as far as the Fed’s stance on withdrawal of liquidity is concerned I believe that it is likely to continue its massive bond purchases for now, tapering it gradually with the onset of 2014 with clear signs of improvement in the jobs outlook. Further, a sustainable recovery in the US should support global growth. On the domestic front too, risks from the current account deficit, fiscal deficit and inflation have materially subsided.
In the Indian context, inflation has been the single largest factor in my view that has hobbled our economy over the last two to three years. Consequently, demand has decelerated, corporate margins have shrunk and our savings and investment rates have plummeted. High inflation has also damaged our competiveness, due to which even after 20 per cent depreciation in the rupee, exports have not yet picked up and the current account deficit is at a somewhat alarming 5 per cent level. But this finally looks all set to change, with the inflation beast finally coming under control. The headline WPI inflation in April came in at 4.9 per cent, more than a 3-year low.
The deceleration in inflation is mainly led by cooling global commodity prices and core inflation (non-food, manufactured inflation) has come in at 2.8 per cent during April 2013. At the same time, the fall in food inflation is also heartening. In keeping with the government’s commitment to fiscal consolidation, we expect MSP price increases to be moderate despite the upcoming elections next year. Its positive impact is likely to come through cooling food prices finally bringing the wage inflation spiral to an end. We are also expecting an improvement in the CAD and fiscal deficit during FY2014. For the trade deficit, moderation in prices of gold and commodity imports is likely to be a much-needed breather. In addition, exports are also expected to revive owing to the global growth outlook and INR depreciation. So, the current account deficit is expected to come in at 3.8-4.0 per cent of GDP in FY2014 as against the estimated 5 per cent of GDP in FY2013. Put together, these factors are also likely to provide more space to the RBI for easing rates. More importantly, I believe the gradual transmission of these rate cuts by banks would bring interest rates down by at least 100 bps. Though the momentum of policy action since September 2012 seems to have come to a halt, I do believe that policy action outside parliament is likely to continue. In this context, the calibrated price hikes in diesel are a key positive. The under-recovery in diesel has come down rather sharply to Rs 3.7/litre as against Rs 13.6/litre and this should boost the picture for government finances. In addition, the Cabinet Committee on Investment is also stepping up clearances and it is a positive trigger for boosting investments.
In my view, the next trigger for the markets other than global cues comes from rate cuts going forward as well as elections. The fact is that India was capable of growing at 6 per cent levels even under earlier coalition governments and in the absence of a global pre-Lehman style boom, purely on its standalone strengths. With the policymakers shedding their complacency and green shoots also emerging in the global economy, an improvement in GDP and earnings growth trajectories looks highly credible. With economic indicators expected to move in the right direction now, it is a matter of time that GDP growth also bounces back to 6-6.5 per cent at least and consequently, corporate earnings growth reverts to at least 14-15 per cent.
With incremental positives slowly but surely falling into place, it won’t be long until markets make new highs. Unfortunately, despite the recent rally, retail investors have so far stayed away from the markets. And I would reiterate that such an environment is the best time to buy equities since the wait for returns is unlikely to be much longer. For the broader market comprising mid caps and small caps, valuations look attractive. Midcaps have so far considerably lagged behind the benchmark indices and defensive sectors. But in our view, once the Sensex makes new highs, midcaps are likely to come into greater focus.
(The writer is Chairman and Managing Director, Angel Broking)