In the new year, we believe the markets are positioned interestingly and offer upside to investors. Following are some of the chief reasons for this view.
Reforms have continued. Recently, foreign direct investment (FDI) in multi-brand retail has become a reality. Reforms, such as direct cash transfers, were unexpected and could be game changers over a period of time as these would allow for market-based pricing of products, enabling companies like those in the oil space to realise their full potential.
The breadth of the Indian stock market is clearly increasing. While reforms are benefitting companies in the power and media space, changed industry dynamics following takeovers, are effecting sectors such as liquor. Still other sectors are benefiting from better capacity utilisation, resulting in better pricing power. These include airlines and cement sectors. Many leveraged companies might see better times, going forward, on account of rate cuts, expected over the next quarter. Firms in minerals and mining, where sentiment was impacted and valuations had dropped on threat of mining lease cancellations, are seeing sentiments revive as clarity emerges on the contentious issue of mining leases.
A number of issues continue to impact market sentiments. These include concerns related to periphery Europe; global growth on account of the US fiscal cliff issue and Chinese regime change, India’s policy making and credit rating, among others. However, these concerns were not allowed to intensify, thanks to timely efforts. For example, concerns relating to periphery Europe got taken care of on time, the fiscal cliff issue was pushed back, Moody’s retained India’s credit rating and reforms like cash transfer of subsidies, FDI in retail and disinvestments are being attempted. Growth numbers from China and India have been encouraging. However, concerns surrounding political stability, fiscal situation and slowing growth remain. To sum up, concerns relating to a catastrophe in the financial markets have receded but those related to the general state of the economy remain.
Earnings outlook might improve, going forward. Over the last year, earnings expectations were brought down significantly. However, going forward, earnings estimates might improve driven by better growth outlook, improved margins on lower commodity prices and lower interest rates.
While the concerns are getting addressed, valuations are still benign and offer upside potential. We are trading at lower-than-average valuations based on one-year forward price to earnings (PE), while we are expecting growth to bottom out soon and interest rate cuts to take place. Valuations on other parameters like P/BV look even more compelling. While concerns remain and Indian investors continue to withdraw from the equity markets, indicating general scepticism, we believe equities have been able to climb a wall of worries over the past 12 months and might continue to be a performing asset class, going forward.
Alternatives like debt and real estate have their own sets of issues in terms of valuations and upsides for global investors.
We expect the quality part of the market, which can fund its growth through internal cash generation and still be left with distributable surplus, to continue to do well in the new year. Consumption-oriented businesses should continue to deliver strong numbers in the run-up to the 2014 elections.
Also, export-oriented businesses, such as pharmaceuticals and two-wheelers, which have pricing power and are focused on emerging markets, are expected to do well. Sectors such as media and financials, which have seen reforms, and oil and gas, which may see reforms in future, present interesting opportunities.
The author is chief investment officer, ASK Investment Managers
