Nov 18 2012 , New Delhi
A few forthcoming events can potentially swing the stock market either way temporarily, and investors who can catch such trends much ahead may expect to make a killing
An impending interest rate cut, the government’s urgency for disinvestment in public sector units and the Union budget, which will mark the beginning of the run-up to the general elections, can all be important cues for investors to take positions in stocks. The recession in the euro zone and the impending tax recast in the US also send out clear signals of another phase of possible weakness for select export-oriented sectors.
“India, which is still predominantly an internal consumption economy compared with its export-driven peers, will draw more attention from investors, especially, as recent economic data suggest a bottoming out. Any weakness would be an opportunity to buy, as I don’t see any reason for the market to collapse,” says Ambareesh Baliga, a market veteran.
December is a month when activities of foreign institutional investors slow down to the bare minimum as the yearend holidays start in the west and overseas investors review their allocation strategies. Since much of the strength seen in the Indian market over the past six months has been attributed to FII inflows, there are chances that the stock market will see a slump over the next few weeks.
FII inflows have already slowed down in November, as the first half of the month saw only Rs 3,600 crore inflow compared with Rs 11,364 crore in October and Rs 19,261 crore in September. The market has also weakened and Sensex has lost 1 per cent so far in November.
Over the past few months, FIIs have been positive on the cyclicals like financials, industrials and energy and on defensive sectors like consumers and pharma apart from software.
While financial was the highest bought sector during the September quarter, software and energy have been the largest underweight sectors for FIIs. “Consumer staple was one sector where FIIs have turned marginally underweight in the September quarter after showing interest over the past three quarters. Industrials has seen significant buying by FIIs while auto is seeing muted interest. Telecom has been seeing selling by FIIs,” said Jyotivardhan Jaipuria, a research analyst with DSP Merrill Lynch India.
Back home, as the crucial winter session of Parliament begins with no sign of any easing in the political polarisation over key reform issues, such as FDI in insurance and retail, there are chances of further deterioration in the political climate, which will send out all the wrong signals to the Street.
This is when an opportunity will arise to buy stocks for investors who believe in the theories that project a steady recovery for the economy in 2013.
The fact that most of the key macroeconomic indicators have all hit their multi-year lows strengthens the argument that the economic downturn may have bottomed out and things will begin to look up in the New Year. Investors who see reasons in these theories will get an opportunity to load up on stocks at cheaper prices in such dips.
“The New Year promises to be better. No doubt, there will be periods of uncertainty and concerns. There may be corrections in the market. The fiscal cliff in the US is expected to be the first big test for global equities. The EU chiefs will also have to keep on working hard to avoid catastrophes. And more importantly, the Indian policy makers will have to announce and implement core sector reforms. One should adopt a bottoms-up approach to invest in companies with ethical management and strong balance sheets, at reasonable valuations,” said Dipen Shah, head of private client group research at Kotak Securities.
Soft rate regime
A reasonable drop in interest rates is a theme projected to play out all through 2013. As industrial growth comes to a grinding halt and credit flow shrinks to a trickle, lowering of interest rates has become a pressing need for the economy.
“We expect the Reserve Bank of India to use the available window of lower core inflation to cut the repo rate by 50 basis points in the first half of 2013, though further aggressive easing appears unlikely, as there is no improvement in the twin deficits,” says Sonal Varma, economist at Nomura India.
Indranil Pan, chief economist at Kotak Mahindra Bank, feels RBI will again hold the rates in December and go for a 50 basis points cut in the January-March quarter.
Given this outlook, there will be an interesting opportunity to take positions on the sectors and stocks that have high domestic interest burden and are poised to benefit from lower interest rates, as the market will soon start factoring in this trigger in those counters.
Such stocks are present all over in sectors like roads, infrastructure, construction, real estate and capital goods. Also, banking stocks will be a big beneficiary of a softer interest rate regime, as it will help them reduce bad loans and grow their credit flow.
Share of PSU pie
After the disastrous 2G spectrum auction, which produced just one-fourth of the targeted revenue, the government is hard-pressed to quickly explore other avenues to mop up funds in order to keep its finances in shape, lest credit rating agencies push the panic button and downgrade India’s sovereign rating.
The budget 2012-13 has targeted to raise Rs 30,000 crore through sale of shares in MMTC, NMDC, Nalco, NLC, Hindustan Copper, Nalco, SAIL, RINL, BHEL and Oil India, some of which can be handsome bets for investors.
While many of these stocks are ruling at cheaper valuations, yet there are expectations that the government will sell those shares at good discounts, considering the weak appetite for equity investment. “The companies selected are mostly seeing cyclical troubles, which means valuation are likely to be bleak,” said Neelkanth Mishra of Credit Suisse.
The austerity drive in the euro zone and the region’s return to recession, and also the emergence of a threat from the fiscal cliff in the US have weakened the prospects for export-oriented sectors. While some analysts say these factors are already built into the prices, investors can consider booking profit on some of these counters and buying those stocks when they fall in knee-jerk reaction to the developments in the US.
“The fiscal cliff does indicate an immediate disaster waiting to happen at the beginning of 2013, and in the midst of an already-fragile recovery and elevated unemployment, this type of a shock will hamper the market. But in the long run, it will actually pave way for sustained growth and smaller debt for the world’s largest economy,” brokerage Geojit Securities said in a note.
February promises interesting times as the new finance minister promises a reasonable budget, aimed at high growth amid expectations that the much-awaited DTC and GST will take effect from the new financial year. Yet, the FM can ill-afford to ignore politics, as it will be the government’s last opportunity to play to the gallery ahead of the general elections in 2014.
Under the circumstances, rural sectors are very likely to see extra focus while there could be some goodies for the urban middle class as well. Investors keen on catching such long-term stories early can look for cues to bet on consumption stocks and rural-focused businesses, which are most likely to make the most from such a situation. zz