Markets: The road ahead

October marks the beginning of the second half of the financial year, and, going by the recent economic, policy-related developments and the markets’ reaction, it promises to be an action-packed one.

The first six months of FY13 have been quite eventful for equity markets across the globe. The scenario was marked by two extremes — optimism given the stimulus hopes on the one hand, and concerns regarding slowing global growth amid Euro zone collapse on the other.

In the Indian context, inflation, deteriorating rupee (against the dollar), stuck policy reforms, widening fiscal deficit and concerns of decelerating growth amid political uncertainty kept gains in check.

Despite this, the Indian equity markets have recorded their best half-yearly performance (financial year basis) in the past two years.

On Monday, October 1, the Sensex and the Nifty end at 18,824 and 5,719 levels, respectively — up 8.15 per cent and 7.99 per cent since March 2012. Investors have seen their market wealth appreciate by Rs 369,134 crore to Rs 6,590,090 crore in the past six months. In the first nine months of calendar year (CY) 2012 ended September 2012, the rise has been a steep 21.8 and 23.7 per cent, respectively.

Liquidity-driven rally
This has been possible due to the gush of liquidity seen through 2012, albeit in phases. At the global level, H1FY13 saw announcement of a third round of quantitative easing (QE3) from the US Federal Reserve and an unlimited bond-buying programme announcement from the European Central Bank (ECB) that helped perk up sentiment towards the fag end. Domestically, the government’s decisions on the economic policy front helped.

Foreign institutional investors have pumped in a net $16.12 billion (Rs 83,692 crore) so far in 2012, data shows. Their net investments stood at $7.3 billion (Rs 39,741 crore) in the first six months.

“Whether the liquidity will continue over the next few months will depend on a few factors. One needs to keep an eye on how the European situation is panning out. The recent measures announced will definitely have a bearing,” says Vaibhav Sanghavi, director (equities), Ambit Capital.

“India clearly stands out among its BRIC and emerging market (EM) peers purely because of the recent policy initiatives by the government. Whether the government will be able to deliver on the higher expectation that is built-in now will also be a key determining factor for the future flows,” he adds.

Cautious stance
While the markets grappled with uncertainty, investors chose to be cautious and preferred to stay with the defensives (FMCG and pharma) rather than high beta names in the beginning of H1FY13 and CY12.

Among individual sectors, the BSE FMCG (fast moving consumer goods) and the Healthcare indices rallied 23.1 per cent and 14.1 per cent since March 2012. The banking index — Bankex (up 11.6 per cent), Capital Goods index (up 10 per cent) and the BSE oil & gas index (up 6.8 per cent) followed.

Wockhardt (up 116 per cent), Jyothy Laboratories (up 96 per cent), Strides Arcolab (up 51 per cent), Hindustan Unilever (up 32 per cent), ITC (up 21 per cent), HDFC Bank (up 20 per cent), ICICI Bank (up 18 per cent) and Reliance Industries (up 12 per cent) are some of the stocks that logged gains since the past six months.

The surprise elements
However, the list throws up some interesting names as well. Given the government’s stance on policy changes and the key corporate developments saw a huge jump in beaten down stocks.

Sample this. Since March 2012, the stocks of Vijay Mallya controlled United Breweries Holdings has gained a massive 112 per cent (nine-month gain: 139 per cent), while United Spirits has rallied 105 per cent (nine-month gain: 152 per cent). September-end reports suggest that the promoters have resumed talks with British spirits giant, Diageo, for a possible stake sale.

Opening up of the foreign direct investment route in the multi-brand retail, norms for cable and digitisation programme saw stocks like Den Network, Zee Entertainment, Pantaloon Retail and Dish TV India rally between 30 and 65 per cent in the last six months.

Overseas investors have bought shares of Cairn India, HCL Technologies, Infotech Enterprises and SKS Microfinance in the past three months, bulk deal data show. “FII money is coming in India in a big way but the same is restricted to only few large-cap stocks, which are already at the peak,” said CNI Research head, Kishore Ostwal.

On the other hand, however, Kemrock Industries, Glodyne Technoserve, Deccan Chronicle Holdings, BEML and Tulip Telecom have seen their market price more than halve on negative news flows.

Will the positive sentiment sustain?
While most analysts are optimistic about the future, they advise caution while investing given the run-up seen till now.

Explains Varun Goel, head-PMS, Karvy, “The liquidity has been good. We have seen inflows to the tune of Rs 9,000 crore so far this month. Besides this, flattish trend of commodity prices (including oil) despite QE3 and a bounce-back in the earnings makes us bullish on the markets’ prospects. We expect the Sensex to touch 21,500 by March 2013 and remain cautious on the information technology, real estate and telecom spaces.”

“The share prices of Sensex and Nifty-based stocks are close to fair valuations and hence cannot expect similar kind of run from hereon. We expect Nifty to close over 6,000 levels in CY12,” says Ostwal.

Points out Manish Sonthalia, vice president and fund manager, Motilal Oswal AMC-PMS, “Barring unforeseen events in Europe which are not only difficult but impossible to fathom, the Indian markets are expected to do well over the next six months. Now that the government is serious in “unleashing the animal spirits” within the economy, the stock markets should logically move higher. I wouldn’t be surprised if the Nifty trades around 6,300-6,400 by March -April 2013.”

However, Amar Ambani, Head of Research, and IIFL cautions that one must be careful as inflation remains sticky and the Reserve Bank of India (RBI) may take a while before slashing rates. The external situation also remains fragile, especially in Europe and China.

Stock picks
So, what should you be buying then? Is it time to shift focus to high beta names or should one still play safe?

Analysts say that stocks related to the recent policy decisions by the government have purely run up basis the positive sentiment. Notes Sanghavi of Ambit, “The rise has been on sentimental reasons rather than on the basis of fundamentals. I would not be too keen to participate in these stocks. It is advisable to wait and watch before investing in these spaces given the sharp rise. If the liquidity does pour in, people will chase high-beta stocks. Telecom sector can be avoided for now; I am keen on financials.”

In a report dated 24 September, Deutsche Equities India recommends Axis Bank, Yes Bank, Reliance Industries, ICICI Bank, JSW Steel and Larsen & Toubro. On the other hand, Goel of Karvy advises to stick with pharma and FMCG stocks as the quality of earnings remains high.

Ostwal expects BHEL, Tata Steel, Bharti Airtel and Infosys, which were the underperformers since the last nine months to do well going ahead.