 "Prateek Agrawal")
In the longer term, the direction of the market would be determined by the growth in earnings, as the present valuations are close to long-term averages. Several of the factors that resulted in growth slowdown such as fiscal and current account strain, high inflation, projects getting stuck on environmental concerns and policy logjam, are being addressed or are reversing.
Sub-par global growth aids the India story through low commodity prices and sustained low inflation and interest rates. With lower inflation, the prospects are high of interest rates falling in India even while growth accelerates. Progress on a goods and services tax (GST), fuel subsidies, foreign direct investment (FDI) in various areas and momentum in coal auctions improves the growth outlook. Corporate earnings could double over four to five years as the operating profit margin returns to the mean and financial costs reduce, resulting in improved return parameters, which would support valuations.
The savings the country makes at current oil prices would top two per cent of gross domestic product, aiding private consumption and enabling the government to spend more on nation building. Lending rates would fall, spurring growth. Project re-starts in metals and mining industries would further help.
Improved consumer confidence, helped by fresh hiring momentum and wage increases, would help sustain the growth rates and improve capacity utilisation over the medium term, leading to restart of the capital expenditure cycle. This would be aided by FDI in defence and other areas.
In the near term, we are looking at three themes playing out. One is commodity price cut-led margin increases. The second is clarity on a GST, which would benefit organised national entities over unorganised regional ones. The third is an interest rate reduction cycle, benefiting retail lenders and borrowers.
We expect businesses which benefit from one or more of the above factors to do well on improved earnings per share estimates. Sectors such as fast moving consumer goods, automobiles and and retail lenders stand out.
The turmoil we saw in the recent past was on account of multiples factors. One was reduction of risk appetite on end-of-year considerations. Then, there is the overweight position of emerging market (EM) and BRIC funds on India and China, and subsequent fund outflows on concerns over commodity meltdown. This impacts most EMs, leading to some selling in India as well. Third, the inability of Russia to fund short-term mismatches in its finances on account of sanctions, leading to sharp currency devaluation.
The first two factors should stabilise in the near term. The third factor could perpetuate, leading to a sharp rise in Russian export competitiveness in areas such as steel. This could impact our industry here on the margins and also stress lenders exposed to the space.
One concern area is the sustained current account deficit. With improved sentiment, import of electronics and gold is increasing. Also, improved power demand is leading to large-scale coal imports. This trend might limit our growth, if it sustains.
Overall, we expect a sustained period of accelerating growth, while valuations are around long-term averages. In the near term, while the growth numbers would continue to be below potential on inventory losses and currency volatility, we expect the markets to sustain its levels. This is due to the improved macro situation, that stands out in the global context. And, expectation of interest rate cuts and a growth-oriented budget. We believe equities offer a compelling story versus other asset classes.
The author is business head & chief investment officer, ASK Investment Managers
