 "Nifty may hit 6,700 before elections")
In calendar year 2013 (CY13), the Nifty notched up marginal gains of 6.8 per cent but gyrated wildly by 1,100 points. Closer to the end of CY13, the index hit a purple patch and touched an all-time high of 6,364. We look forward to CY2014 with renewed optimism, as the positives outweigh the negative. We may have probably left many uncertainties behind us, as 2014 dawns with the global and domestic economy improving and we can expect GDP growth and earnings, which we believe have bottomed out in 2013, to show an uptrend. We must look at both risks and opportunities as we project into this year.
There will be global uncertainty around the taper programme and growth in developed economies. A reasonable portion of earnings in the index companies in information technology (IT), pharmaceuticals and automobiles are linked to global economies. In addition, due to paucity of domestic savings in equity we are overly dependent on foreign institutional investor (FII) flows for our equity requirements, both for primary as well as secondary markets. Any depreciation in our currency has immediate negative impact on the FII flows. We can expect a stable to mildly depreciating dollar-rupee this year with a stable current account deficit.
General elections-2014 assume significance in the context of risk to sovereign rating and investment cycle. A stable elected government is good for sovereign rating and FII flow. Revival of the investment cycle will also depend on the priorities-infrastructure versus social spending-of the new government.
A well-distributed monsoon last year ensured a bumper kharif harvest and a similar rabi harvest is likely to follow. Agriculture growth will continue to boost rural income and rural consumption. This will help two-wheelers and select fast moving consumer goods (FMCG) with low penetrated categories and rural focus. However, urban discretionary spending will continue to remain subdued till the economic growth picks up, inflation drops and/or salaries increase. This does not bode well for domestically exposed automobile companies.
Exports will continue to be a growth driver in this calendar year on the back of an improving global macroeconomic environment and a depreciated rupee. This will continue to benefit sectors such as IT, pharmaceuticals, commodity exporters and companies which have a global footprint and a large part of earnings abroad. Furthermore, favourable regulations and consolidation in certain sectors such as oil and gas (private sector) and telecommunications will help them continue to improve their profitability.
Debottlenecking of investments has already been done and will increase capital efficiency in the country as a lot of stuck projects will start being delivered. However, fresh investments are still some time away and the outlook appears good for low leveraged capital goods such as L&T and PowerGrid. Other infra stocks could be trading opportunities based on news flows around deleveraging by asset sales or getting sanctions, approvals to kick start stuck projects.
Banks might continue to be under pressure due to high cost of funds, sluggish demand for corporate credit and elevated bad loan levels. We continue to prefer private sector banks over public sector ones as the latter are likely to see significant dilutions due to capital requirements. Finally, mid-caps might be back in action in this calendar year.
Select mid-caps with clean balance sheet and leadership poised for gains as valuation gap with large cap converge
We expect Nifty to sniff 6,700 pre-election and if there is a decisive government, it can move even higher. We expect the Nifty to trade in the 6,000-6,800 range during CY14. Relative to Nifty, we are overweight on IT, pharmaceuticals, oil and gas, telecom, cement and energy; underweight on financials (banks and non-banking financial companies), industrials, materials and real estate; and equal weight on auto, FMCG and utilities. With the Indian economy seeming to be on an uptrend, we may have probably passed the darkest hour before the dawn of 2014.
The author is managing director and chief executive officer, ICICI Securities
There will be global uncertainty around the taper programme and growth in developed economies. A reasonable portion of earnings in the index companies in information technology (IT), pharmaceuticals and automobiles are linked to global economies. In addition, due to paucity of domestic savings in equity we are overly dependent on foreign institutional investor (FII) flows for our equity requirements, both for primary as well as secondary markets. Any depreciation in our currency has immediate negative impact on the FII flows. We can expect a stable to mildly depreciating dollar-rupee this year with a stable current account deficit.
General elections-2014 assume significance in the context of risk to sovereign rating and investment cycle. A stable elected government is good for sovereign rating and FII flow. Revival of the investment cycle will also depend on the priorities-infrastructure versus social spending-of the new government.
A well-distributed monsoon last year ensured a bumper kharif harvest and a similar rabi harvest is likely to follow. Agriculture growth will continue to boost rural income and rural consumption. This will help two-wheelers and select fast moving consumer goods (FMCG) with low penetrated categories and rural focus. However, urban discretionary spending will continue to remain subdued till the economic growth picks up, inflation drops and/or salaries increase. This does not bode well for domestically exposed automobile companies.
Exports will continue to be a growth driver in this calendar year on the back of an improving global macroeconomic environment and a depreciated rupee. This will continue to benefit sectors such as IT, pharmaceuticals, commodity exporters and companies which have a global footprint and a large part of earnings abroad. Furthermore, favourable regulations and consolidation in certain sectors such as oil and gas (private sector) and telecommunications will help them continue to improve their profitability.
Debottlenecking of investments has already been done and will increase capital efficiency in the country as a lot of stuck projects will start being delivered. However, fresh investments are still some time away and the outlook appears good for low leveraged capital goods such as L&T and PowerGrid. Other infra stocks could be trading opportunities based on news flows around deleveraging by asset sales or getting sanctions, approvals to kick start stuck projects.
Banks might continue to be under pressure due to high cost of funds, sluggish demand for corporate credit and elevated bad loan levels. We continue to prefer private sector banks over public sector ones as the latter are likely to see significant dilutions due to capital requirements. Finally, mid-caps might be back in action in this calendar year.
Select mid-caps with clean balance sheet and leadership poised for gains as valuation gap with large cap converge
We expect Nifty to sniff 6,700 pre-election and if there is a decisive government, it can move even higher. We expect the Nifty to trade in the 6,000-6,800 range during CY14. Relative to Nifty, we are overweight on IT, pharmaceuticals, oil and gas, telecom, cement and energy; underweight on financials (banks and non-banking financial companies), industrials, materials and real estate; and equal weight on auto, FMCG and utilities. With the Indian economy seeming to be on an uptrend, we may have probably passed the darkest hour before the dawn of 2014.
The author is managing director and chief executive officer, ICICI Securities