Equities have emerged as the least preferred asset class lately, and this is not without reason. Equity markets have not given any returns since September 2007 when the Sensex first touched 17,000, which is the level even today, although corporate earnings have grown by almost 40 per cent over the last four years.
The beginning of this calendar year saw global equity markets rally, implying that everything once again looks well with the world. Indian equity markets too, participated in this upmove, gaining almost 20 per cent in a couple of months from the beginning of the year. Though there were no major changes on the ground level, what did change was the risk appetite with global efforts to provide liquidity in the Euro region and sequentially improving economic print along with attractive valuations.
Key global economic data has been in line with expectations (having softened a little since March after a strong run-up in January-February). However, stability in the financial markets is far from achieved. Both the Euro crisis and the US growth debate will stay unresolved for many months. Also, whether China will experience a soft or hard landing is unlikely to reach a definitive conclusion soon. We, however, continue to believe that disaster will be avoided in 2012 with room to spare and this probability is not appropriately priced into equity valuations positively. This makes us bullish on equities across the globe, including India.
On the domestic macro front, we look at key indicators — inflation, industrial production and policy measures. We believe gross domestic product growth of 6.1 per cent in Q3 could have reached the nadir and it can only improve from hereon as much of the slowdown is due to cyclical and not structural issues. So, economic recovery is imminent, which will translate into corporate earnings with a time lag. Inflation has been hovering at a comfortable trajectory of around seven per cent over the last few months. Growth in industrial output has improved. However, with the recent rate cut, a gradual recovery could not be ruled out. Lack of policy measures have been a major disappointment among global investors. Some changes to plug fuel linkages in the power sector have come through but the momentum should continue to revive investor interest and hence fund inflows from foreign institutional investors.
We believe India's long-term story remains intact with valuations favouring investors. Markets could remain volatile in the short term due to issues in the Middle East and/or Korea, high crude prices, widening twin deficit and lack of clarification on the General Anti-Avoidance Rule. One should use any interim weakness to build an equity portfolio with an eye on stock picking. Though near-term challenges may persist for some time, patience will be rewarded over time.
The author is director, equity advisory, Barclays – Wealth and Investment Management Division
