 "Financials,discretionary spend sectors key gainers")
Stock market returns are never very predictable. However, a few broad themes can be discerned in the next year’s economic picture. Global economic growth is likely to remain rather weak and will mean commodities in general will be on the cheap side. Crude, coal, gas, and non-precious metals are all likely to be in the doldrums. This could change if there are supply disruptions of course. Crude and gas are more likely to be vulnerable to such possibilities because of wars and tensions in West Asia and in Russia. Against that, there are fair chances of production ramping up in Iraq and Libya and Iran benefiting from the removal of sanctions. Let's say that if nothing serious blows up, commodities will be cheap.
If commodities are relatively cheap, the input costs for manufactured goods are also cheap. This could mean that margins improve for manufacturers and demand could also improve if consumers are tempted by lower prices. If basic non-agro commodities and manufactured goods are relatively cheap, inflation will also continue to run on the low side. There could well be a big, widening gap between wholesale and retail inflation, however. This is because food is a big component of the consumer price index (CPI), contributing nearly 50 per cent to the CPI, while it only contributes about 15 per cent to Wholesale price index (WPI).
If food prices spiral up, the CPI would rise much more than WPI. However inflation is, by and large, likely to run low through 2015. Low inflation should lead to lower policy rates at some stage from the Reserve Bank of India. A cut in policy rates will be transmitted to commercial interest rates, which will also reduce. This will considerably ease stresses for India Inc, which is neck-deep in debt. It could also make hire-purchase terms more attractive for middle-class consumers who buy with more attention to the equated monthly instalments than to the sticker price. In turn, this will mean a boost to consumer finance players. If this line of logic holds, the attention of the short-term and medium term stock market speculator will shift to areas of discretionary consumption and to financial players who enable big ticket purchases. Commodity stocks such as metals producers will languish due to lower realisations.
Energy is a different game because the Indian energy sector is so badly mired in strange policy decisions and the legacy of strange policy decisions. If normal market conditions prevailed, lower crude and gas prices would just feed through the system. Primary producers would make less money while secondary producers (such as refiners) and distributors and users (such as the transport, fertiliser and power industries) would all see rising margins.
But as things stand, there are many distortions any investor looking at the energy sector must try and find plausible answers to the following questions: What does the government do with the coal allocations cancelled by the Supreme Court? How does it sort out the massive losses and bad debt in the power sector? Why did it decontrol diesel only to "recontrol" by insisting that excise rate hikes are not passed on? Is there a chance of long-term sanity in gas sector pricing? Since those answers are very likely to be driven by political considerations, including extremely short-term political considerations, it is dangerous to make long-term bets on the energy sector. If we ignore energy, financials and sectors dependent on big ticket discretionary spending are the two areas, which should see a major rise in overall income and in profits through the next year to 18 months. A long-term investor may also be interested in looking at metals. Metals also have long cycles and if prices bottom out in 2015-16, there could be major gains two or three years down the line.
If commodities are relatively cheap, the input costs for manufactured goods are also cheap. This could mean that margins improve for manufacturers and demand could also improve if consumers are tempted by lower prices. If basic non-agro commodities and manufactured goods are relatively cheap, inflation will also continue to run on the low side. There could well be a big, widening gap between wholesale and retail inflation, however. This is because food is a big component of the consumer price index (CPI), contributing nearly 50 per cent to the CPI, while it only contributes about 15 per cent to Wholesale price index (WPI).
If food prices spiral up, the CPI would rise much more than WPI. However inflation is, by and large, likely to run low through 2015. Low inflation should lead to lower policy rates at some stage from the Reserve Bank of India. A cut in policy rates will be transmitted to commercial interest rates, which will also reduce. This will considerably ease stresses for India Inc, which is neck-deep in debt. It could also make hire-purchase terms more attractive for middle-class consumers who buy with more attention to the equated monthly instalments than to the sticker price. In turn, this will mean a boost to consumer finance players. If this line of logic holds, the attention of the short-term and medium term stock market speculator will shift to areas of discretionary consumption and to financial players who enable big ticket purchases. Commodity stocks such as metals producers will languish due to lower realisations.
Energy is a different game because the Indian energy sector is so badly mired in strange policy decisions and the legacy of strange policy decisions. If normal market conditions prevailed, lower crude and gas prices would just feed through the system. Primary producers would make less money while secondary producers (such as refiners) and distributors and users (such as the transport, fertiliser and power industries) would all see rising margins.
But as things stand, there are many distortions any investor looking at the energy sector must try and find plausible answers to the following questions: What does the government do with the coal allocations cancelled by the Supreme Court? How does it sort out the massive losses and bad debt in the power sector? Why did it decontrol diesel only to "recontrol" by insisting that excise rate hikes are not passed on? Is there a chance of long-term sanity in gas sector pricing? Since those answers are very likely to be driven by political considerations, including extremely short-term political considerations, it is dangerous to make long-term bets on the energy sector. If we ignore energy, financials and sectors dependent on big ticket discretionary spending are the two areas, which should see a major rise in overall income and in profits through the next year to 18 months. A long-term investor may also be interested in looking at metals. Metals also have long cycles and if prices bottom out in 2015-16, there could be major gains two or three years down the line.
The author is a technical and equity analyst