Perspective on economy, equities, commodities & investment strategy from Mr. Rajesh Iyer, Head of Investments & Family Office, Kotak Wealth Management
Outlook on the performance of international and domestic equities, commodities during the weekUS markets are up ~1.6% this week and Euro Stoxx 50 Index is up 3.3%. Since the Ukraine issue did not snowball there is recovery in commodity driven countries like Russia and Brazil. Asia and other emerging markets have remain flat because of the continued phasing out of QE by the Fed. India's Nifty has remained flat in the last one week on account of the weakness seen in other emerging markets. The sharp rise in the previous week could is also leading to some kind of consolidation in Indian markets at current Nifty level of ~6500.
Equities: Various parameters affecting Indian equities have seen improvement in the last four months. (i.e. Global GDP growth, Global PMIs, currency, twin deficits, earnings visibility, valuations, FII flows & Politics). Only factor that is negative is high interest rates, which seems to have peaked out given the steep fall in inflation. There are concerns on El-Nino formation this year. If this turns into a reality then it could shave off ~0.5-0.7% of potential GDP growth in FY15. Our observation is that corporate growth and earnings are running ahead of the economy. It seems earnings have bottomed out but economy may take another 2-3 quarters to bottom out.
Commodities: Our view on commodities is negative keeping in mind the consistent slowdown in Chinese economy. The near self sufficiency of US in gas and slowdown in China should keep crude prices under check. If developed nations continue to recover then it will have a positive rub-off on equities and that should keep precious metals prices soft. Potential rise in interest rates in the US and UK in future would also be negative for Gold.
Wealth creation opportunities for HNIs in the equity markets Since Nifty has gone into a new zone it is wise for HNIs to get invested and remain invested in equities. A mix of 67% into economy driven sectors and the remaining 33% into defensives sectors should be the ideal mix on direct equities. For investors who want to protect their portfolios can look to buy May'14 PUTs to the extent of 50-70% of the portfolio value.
Investment strategy for HNIs post elections We are very comfortable on the earnings growth trajectory for FY14 & FY15E since >70% of Nifty companies provide good visibility. On most parameters ranging from PE ratio, Price/BV, EV/EBITDA to Market Cap/GDP, Nifty is trading below its 5 & 10 year averages. Excluding P/E ratio on most parameters, Nifty trades at ~15-25% discount to its 10 year average. We recommend 100% deployment into equities as of now since the upside risk in equities could be far higher than the downside risk.
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If the election mandate is good and there is a NDA regime then we could see a two-three years of bull market. Investors can expect a 15% CAGR for next 2-3 years under this scenario, hence it will be wise to stay invested post-election. Any non NDA formation will be negative for market and we could see a 10-15% correction in the near term. However, we do expect to see uptick after few months as any new government will need to continue with the reforms process. In worst case scenario if we have a third front forming the government then it valuations will could contract and we could recommend going underweight on equities. As of now the probability of a NDA forming the government is very high and we are going with this assumption.
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