Good Times Ahead?

The Smart Investor checks out what marketmen have to say about the current state of the market. The consensus: a stable coalition government would revive the economy and this in turn will see an increased inflow of FII funds and a general bullishness for the next three to six months

In the midst of all the political uncertainty in the country, net foreign institutional investment in India turned positive in February as net investment increased by $120.3 million. This is an encouraging sign considering the fact that most FIIs were net sellers in the past four months. Another encouraging development last week was the news that South Asia Regional Fund, floated jointly by the UK-based Commonwealth Development Corporation and financial institutions from India, Pakistan and Singapore, raised $115 million in its first tranche. The funds will be invested primarily in equities and quasi-equity instruments. The largest part of this fund will be invested in India.

All this had a positive reaction on the market. The BSE Sensex moved by 184.58 points in the past one week. The general enthusiasm is understandable as FIIs are the biggest investors in the markets today. This, in turn, has created psychological pressure on a market that is still mostly sentiment driven. But how long will this bull run in the market continue? Which party will form the new government at the centre? Will the economic outlook change?

For the answers, The Smart Investor spoke to various heads of research at broking firms and institutional investors. Almost all seem unanimous that the next government at the centre will be a coalition government but this time the coalition would be much stronger than last time as most of them expect a party with a larger number of seats to come into power. Also the general consensus is that the main task of the new government will be to revive the economy and most of the measures will come through additional investment in the infrastructure sector.

On FII inflows, the general feeling is that additional inflow will come in once the economy picks up. On the rupee-dollar front, the reaction is mixed. Some expect the rupee to depreciate by 8-10 per cent in the next two months, while others expect it to appreciate slightly. But Sameer Arora, chief investment officer, Alliance Capital, has the best answer as he points out that the stability of the rupee is a factor only when markets are falling. In a boom phase, investors are indifferent, having already factored in the expected depreciation before making allocations.

But the bottomline for investors is to stay invested in defensive stocks like software, pharmaceutical, telecom, fast moving consumer goods, banking and oil. Other sectors such as cement, steel, capital goods and engineering goods are some of the sectors to watch as most marketmen expect them to revive in the coming months.

But sectors such as commercial vehicles, tractors, hotels, shipping, textile and real estate should be avoided. Over to the experts.

The market scenario looks bullish and I expect the BSE Sensex to zoom up and cross the 4000 mark in the next six months. The next government is expected to be more stable than what it was before, in other words, the more stable party will form the government. The liquidity is expected to improve by April and infrastructure spending will take off in the next 6-12 months. Moreover, considering the rupee has reached a stable level and the South East Asian crisis has passed, the Reserve Bank of India will undo the steps it took to control the rupee rally. As such, the early signs of revival of the economy are showing and business confidence cannot get worse than what it is. It is a time to buy.

The FIIs that are already here will stay invested, but this being a good entry point new players are also coming in. There also exists an investor fatigue as four years have passed without returns, which is a very long time. But things are coming to a head now and one can see a change in perception and a stage set for buy- backs. The rupee stability is very important to FII inflows and the Rupee is expected to depreciate by 5-7 per cent in the next 12 months. The rupee has to depreciate secularly, so one can look at stocks in terms of rupee neutrality.

From a portfolio manager's point of view, no industry should be avoided. However, pharmaceutical, software, fast moving consumer goods (FMCGs) and cement are sectors which can give good returns. For a small investor, mutual funds make a good investment option, but it is time to educate them so that they know the fund manager and his track record. In effect, they should look at mutual funds as a two year investment option.

The most positive sign for the market appeared last month when the FII inflow in the country turned positive. FII inflows will improve in the second quarter, especially after the election. Things would be better in case a stable coalition government comes into power, which in turn will further boost the economic liberalisation process in the country.

I am currently bullish on stocks in fast moving consumer goods, software, pharmaceutical and telecom. In the coming months as the economic recovery signals become clearer, investors could look at stocks in the engineering, automobile and auto ancillary segment. I expect the BSE Sensex at 4925 level by the year end.

A lot depends on the outcome of the election. In case of a hung parliament, then market sentiment would be mixed. But in case of a coalition, the government would be more stable as it would be a party with majority seats that will come to power. But the economic agenda of the new government is unlikely to change. The markets will witness a major bull run in case economic revival takes place and the monsoons are good. The BSE Sensex should move to around 4300 levels by December.

Though the FII inflows in Asian markets will be lower, allocation for India is expected to go up. However, the level of inflow would be at the same level as in the previous year. The rupee will not depreciate as the inflow on account of capital inflow will smoothen out the volatility. In the worst case, the rupee might depreciate by 8-10 per cent. I am positive on consumer goods, infrastructure and engineering goods and refineries. On the other hand, I hold a negative view on sectors such as hotels, real estate, steel, shipping and textiles. But small investors need to look at the mutual fund route and could invest in well managed companies after an in-depth study.

As the main task of the new government is to revive the economy, this has fuelled the current rally. I am presently bullish on the pharmaceuticals and consumer non-durables industries. And one year later, core sector industries like cement, steel and capital goods should improve.

As far as FII inflows are concerned, I expect that FIIs inflows in the Indian market may be more or less at the same levels in absolute terms. But in percentage terms, India's share in the emerging markets' fund allocation may see a fall as other market such as Korea and Indonesia have seen an overcorrection and appear attractive at their levels.

I find MTNL, HPCL, Infosys Technologies, TVS Suzuki, ABB, State Bank of India and HDFC Bank attractive. But I continue to hold a negative view on commercial vehicles, steel, paper, cotton textile and tractors. Retail investors should look for investment opportunities in a number of mid-cap companies like Philips India which have undertaken a major restructuring exercise in the recent past.

The recent bout of purchases by the FIIs has been driven by the fact that most of them were sitting on a pile of cash which had been accumulated because of profit booking not only in India but also in other markets. The market however, did not fall as much as expectations. Then when the market started rising, there was a panic and the FIIs wanted to be party to the rally.

There has been no re-allocation of funds to India as such. In any case, allocations change as frequently as do markets -- markets not just in India but all markets where FIIs would have an exposure. Allocations are driven by market movements. Those who moved out of the markets are mainly the brokers who were not able to generate enough business or lost out on speculative transactions.

The stability of the rupee is a factor only when markets are falling. In a boom phase, investors are indifferent, having already factored in the expected depreciation before making allocations. The market scenario six months down the line does not matter since buying has been in some specific counters only, mainly the blue chips which are expected to perform well in spite of the economy. These are scrips which have been rising even in the past. Appreciation is expected from these scrips and not from the Sensex.

My favourite sectors remain consumer goods, software, oil and gas and pharmaceuticals. Within these sectors Hindustan Lever, ITC, HPCL, Cochin Refineries and Hindustan Oil Exploration look attractive. The emerging blue chips would be Zee Telefilms, Vesuvius, Digital, Corporation Bank, HDFC Bank and Gujarat Gas among others.

In the next three months, I expect the market to be buoyant and expect the BSE Sensex to move in the region of 3500-4000. But the sentiments in the third quarter would depend on the monsoons and how the economy picks up, which depends upon the government and its budget proposal. The FII allocation to the Indian markets is likely to be higher as the total allocation to emerging markets may come down.

Currently I am positive on the software, FMCG, telecom and the pharmaceutical sector. Hindustan Lever, MTNL, State Bank of India, Corporation Bank and Nestle are particularly attractive.

But sectors such as steel, cement and capital goods should be avoided till a clearer picture on the infrastructure spending by the government becomes clearer.

The market has gone up in anticipation of a stable government in the future. Over the next six months, an appreciation of about 10 per cent can be expected in the market. The recent FII interest was mainly a case of their re-entering the market which had fallen substantially, offering good investment opportunities. Also, in the past, the market has risen after the elections. The present round of buying was triggered by that to some extent. It is a myth that the entire FII allocations move as a block -- each FII has its own view on India which may not be influenced by the other investors. India is relatively insulated from the South East Asian currency meltdown and therefore offers a good hedge opportunity. Compared to historical valuations current valuations look attractive.

The defensive sectors ie those not linked to either the Indian or the global economy make good purchases. Thus sectors like telecom, software, fast moving consumer goods, pharmaceuticals and oil look attractive. Within these sectors companies which are good investments are HPCL, MTNL, ITC, Cipla, Dr. Reddy's Laboratories, NIIT, Infosys and Satyam Computers.

By the year end, I expect the sensex to reach 4100 points. A lot of market appreciation will depend on the composition of the government and the budget that is presented.

The FII allocations will depend upon political stability, followed by attractive valuations. A lot hinges on the government and the confidence that it can build vis-a-vis the market. The earlier government was not lacking in policy initiatives, but there was just no confidence.

Industrial growth should be higher than the current "bottom of the barrel" growth at 2-3 per cent. There is bound to be an upswing in industrial growth, and if the government takes efforts to kickstart recovery with planned expenditure in the core and infrastructure sectors, then one can expect even a sustainable growth at 8-9 per cent. FII inflows depend primarily on the stability of the rupee as significant depreciation would wipe off their investments.

Small investors should not put their money in B1 and B2 stocks but could invest in the debt market as interest rates are high. Though the mindset is against mutual funds, the international trend of investing in mutual funds will catch on.

Industries to be avoided by investors are cement, steel, four wheelers and all the domestic cyclical industries till the time the government is stable and the market picks up. In the present scenario, investors should put money in software, telecom, consumer durables and two wheelers. Possible good picks in the market are ITC, Hindustan Lever, HPCL, ONGC, Pond's and Tata Tea.

I am extremely bullish on the market for the next few months regardless of the extremely poor fundamentals with continuing political turmoil. This is an ideal entry point for FII allocations as long as they time their exit when the market is at 4500-5000 points. FIIs are completely unimportant as long as the stability of the rupee is concerned except in the extremely short run. Only trade flows or the political situation can make a difference and affect the stability of the rupee.

Our markets are irrational and unfortunately depend on market technicals. Last year, the industrial growth dropped but the market grew 50 per cent though it collapsed later. I believe that industrial growth will be zero this year yet the market is likely to appreciate at the rate of 20-30 per cent in the next few months.

The sectors to be avoided in the next few economic cycles are petrochemicals and textiles while the upbeat sector is two wheelers. The small investor should invest only in large companies. Investment in small companies is fine if they are to be taken over by the large ones. MTNL, Bajaj Auto, Indian Hotels and Ranbaxy are the good companies in the market. LML and Ranbaxy can be considered as the emerging Indian blue chip companies.