Since 2009, markets have been less volatile and more range-bound. Markets will be impacted by two important events over the next one year. These are India's national elections and how the US Fed handles interest rates and quantitative easing. How markets will react to the outcomes of these two events is pretty unpredictable. From a long-term perspective of investing in equities, the only parameter that is missing today in India is a pick-up in growth. The remaining three parameters - fiscal deficit, current account deficit or CAD and inflation - seem to be on the right trajectory. The government's affirmative action towards driving fiscal consolidation has been the biggest takeaway from Budget 2013. CAD has been the biggest concern plaguing the Indian economy for quite some time.
Recently, CAD hit a record high of 6.7 per cent. The relief now is on expectation CAD will decline due to a sharp drop in gold and crude oil prices in recent months. International gold prices have declined almost 15 per cent and also to its lowest level in the past one year to $1,355 an ounce on the London Bullion Market Association as on May 20, 2013. On the other hand, Brent crude oil prices had declined 14 per cent over a year to $102 per barrel on April 30, 2013, though prices have marginally risen since then to $105 per barrel as on May 20, 2013. WPI inflation decelerated below five per cent in April for the first time since November 2009. We feel, there is a high probability of average inflation for FY2013-14 at five per cent; lower than RBI's 5.5 per cent projection. Finally the missing parameter, growth, has to eventually pick up and is a definite.
How soon it does is not clear now. Maybe this year or the following one, but it has to pick up.
While the level on the Sensex seems to be high, metrics are very different than those seen in 2007. On the valuation front, the market aggregates in our view do not reflect anything. The dichotomy of divergence in valuation of stocks remains. There are few large-caps trading at very premium valuations; these are the ones that have gone up on account of bulk interest by foreign institutional investors. The market, excluding these stocks, is trading at reasonably attractive valuations and particularly mid- and small-cap stocks appear very cheap. Hence, we believe there are plenty of opportunities.
Sectorally, we continue to remain underweight on fast-moving consumer goods. While this call hasn't played out, we still believe that valuations in this sector are very expensive. We are overweight regulated utilities and export-oriented sectors. In the pharmaceuticals sector, valuations are no longer cheap and periodic corrections are likely. We have been overweight this sector for the past six to seven years and over this period, valuations in this sector have re-rated pretty significantly. The sector is expected to do well in a strong dollar environment. Hence, over next two to three years, the outlook for the sector seems reasonably good.
I think, the challenge for investors at this point in time is that they are unsure about the outcome of the two events which we spoke about earlier and hence, are shying away from investing. In our view, we are in a situation where people should still consider investing in equities. We recommend investing gradually in core equity products or in products which benefit from out of volatility and look long-term.
The author is managing director & chief executive officer, ICICI Prudential AMC
