 "Sanjay Chawla")
The Indian equity markets are at a remarkably interesting juncture. In the past couple of years, all the factors that impact markets have hit a nadir. Now, they are all inching up.
The global economy is stable. Geopolitical risk has reduced considerably. All these imply that commodity prices are not volatile. This augurs well for the Indian economy in particular, since India is still dependent on imported crude oil and coal for meeting its energy requirements.
To revitalise the domestic economy, the agenda for the new government can be reasonably demarcated into three phases. The immediate targets would be to tackle inflation, revive investor confidence and get stalled projects off the ground. The medium-term target should be to attract fresh investments in infrastructure. Finally, the long-term goal should be to ensure implementation of all projects and policies is carried out effectively and in a transparent manner. If the new dispensation is able to contribute meaningfully in the short, medium and long term, it would ensure the bull market sustains for a long time.
In terms of earnings, March 2014 was the third consecutive quarter of earnings beating consensus estimates. For 2014-15, earnings are expected to grow decently and be a shade better than FY14. Despite the markets rallying in recent times, the PE multiples of 15-16x are still in line with the long-term averages. To build a case for re-rating, we need to see improvement in return on equity. This is likely to get reflected in FY16.
It would be naïve to simply look at stressed sectors and companies and hope the new government would come to their rescue. It is critical to look at the viability of businesses. However, during the initial rally, we are likely to see all stocks giving similar returns - more of a relief rally than a structural turnaround story.
In recent times, mid-caps have outperformed large-caps. This is despite the fact that the fundamental performance of mid-caps has been, at best, lacklustre and lagging their large-cap peers. Lower profit growth in mid-caps is partly due to high interest cost. To justify investments in mid-caps, we need to see much higher traction in their profitability in the coming quarters.
A key factor which can have a bearing on the markets is high expectations from the Budget. It would be unfair to expect any dramatic reform, given the short stint of the new government in office. Hence, even if the market reacts not so positively post-Budget, we expect foreign institutional investors to use this dip to buy into the markets. Global emerging market funds are still underweight on India. Hence, we see any dip as a buying opportunity.
Over a longer period, equity is probably one of the safest investment options that beats inflation. Time to review the stance on equity. Time to invest.
The author is chief investment officer, Baroda Pioneer AMC
