We believe, the rise in the indices in the months of January and February has been slightly ahead of fundamentals, driven primarily by liquidity, making the market fairly priced at this point in time. While the quarterly numbers were in line with expectations, they were achieved after tweaking the rules regarding treatment of losses arising out of forex volatility. Similarly, going forward, rules to provide for non-performing assets (NPAs) in case of restructured assets have been reworked. After a strong rally in January, a lot of the cash on the sidelines has been invested and valuations across market segments have moved up considerably. For India, the macro situation does not look cheerful. India now has the second highest current account deficit in the world and the currency is expected to be under pressure, especially if it is unable to attract new capital flows. Oil prices continue to stay high putting severe pressure on the fiscal. Budget 2012-13 has not addressed growth and fiscal deficit concerns and sovereign rating may get impacted if reforms are not rolled out quickly.
The prospects of a large government borrowing program have hurt sentiment towards rate sensitives. Moreover, if Basel- III norms are implemented according to the current proposal, these would imply significant de-leveraging over the next five years. Banks may have to raise significant equity while being faced with the prospects of lower return ratios. This would structurally depress valuations.
Key issues concerning growth in terms of coal block allocation / auction and land acquisition rules have not been resolved as yet. The problem of fuel linkage with power plants has increased the threat of NPAs in the banking system. The possibility of higher taxation of mining profits which, while being fair, would impact stock market valuations. Uncertainty in the macro environment is impacting capex commitments and these have been falling sharply. From an economy, which has the potential to grow at around nine per cent, we may achieve closer to only 6.5 per cent growth next year.
For the markets to look up, key drivers need to be in place. These include aggressive monetary loosening by the central bank, strong moves by the government to cut subsidies and market-based pricing for national assets, like spectrum, coal, iron ore and bauxite, among others. The government's moves towards value-creating privatisations, rather than disinvestments, would also help sentiments.
Going forward, it may be a more bottoms-up market with focus on individual stock picking. While strong liquidity flows in the global economy may help, global flows are being matched by the supply of fresh paper and exit of domestic investors on every rise in the market. We believe, once again stocks with predictable earnings, cash on the balance sheet, no requirement for external funding and high return ratios may find favour in the market versus highly leveraged stocks promising aggressive growth prospects.
The author is chief investment officer, ASK Investment Managers