There has been a fair bit of momentum built up on expectations from the government on the policy front. However, it is difficult to gauge how far or how long such moves could last. We could see a further upside from current levels if the government makes some announcements. Yet, realistically, we shouldn't expect many policy announcements in this "short" window of opportunity.
We are very surprised by the foreign institutional investor (FII) flows, though, there remains a question mark on the quality of FIIs coming in. Most of the well known FIIs are not very bullish on India. They are ‘equal’ or ‘underweight’ on India in their emerging market allocation. On the other hand, giving the benefit of doubt, FIIs could look to increase emerging market weight amidst sustained concern on a global slowdown, as these markets offer growth, even if it is lower than last year's.
However, earnings are slowing down with consensus growth estimates in single-digit for financial year 2013. It will also not be a uniform single-digit for all four quarters. The initial quarters may see negative to marginal growth, with a pick-up likely in the latter part of the fiscal. The worst quarter, we believe, will be September because this time Diwali is deferred by one month. So, a lot of sales will get postponed to the third quarter rather than the second quarter and the high base effect of last year may make the September quarter numbers skewed.
We face twin challenges as an economy. First, our growth rates are slowing down and the investment cycle has more or less broken down. Secondly, domestic consumption has led to inflation sustaining at over six per cent, which has led to RBI keeping interest rates high. Thus, the government needs to contain consumption and boost investments. Fiscal consolidation is imperative from the government to move the needle on the inflation front, to nudge RBI to start cutting interest rates. On the other hand, to kick-start the investment cycle, it would be critical to bring clarity on policy measures, especially for sectors like power, telecom and mining. This would make investors feel comfortable that after having invested/or committing significant capital, policies are stable enough for them to earn reasonable returns.
We hope the economy improves in the second half of FY13. This has led us to increase the beta of our portfolios, albeit in a gradual manner. Last year, we were at a beta of less than 0.70, now we are at 0.84. However, our tilt is still in favour of domestic consumption plays. Though the infra/investment theme holds potential, the environment isn’t yet conducive. Staying away from smaller companies (in the infra space) would also be a good thing for now. For investors, the current scenario where fixed income offers high single digit returns, the relevance of investing in equity may be low or negligible. However, in the past, investing in equities at current valuations has generated returns exceeding fixed income, if the investor was willing to remain invested for a period exceeding 30 months.
The author is Head-Equities, UTI Mutual Fund