The markets have remained resilient for better part of last year. How do you see them faring in the coming months?
Markets have fared well last year despite a slew of negative news such as US Fed tapering, high current account deficit, tight monetary policy and high level of inflation. Some of the measures taken by the government and the RBI to arrest the weakening currency and curtail current account deficit have paid off. The continued inflow of FII money into the Indian equity market has helped the overall performance. Also, the renewed optimism of a stable government in forthcoming elections has contributed to the rally. Corporate earnings performance too has improved. During the first half of this fiscal, we have not seen any downgrades in earnings after eight previous quarters of downgrades. In the coming months we would see increased clarity whether the quarterly results were a one-quarter phenomenon or whether this would be sustained. However, at this point we believe the corporate earnings are on the recovery path, and are likely to accelerate post the general elections. We are positive on the market for the next one to two year perspective.
How do you see the Q3 earnings season; what is your outlook on earnings in the coming fiscal?
We are expecting IT and pharmaceutical sectors to report good results on the back of continued benefit of weak currency on year-on-year basis. Trends in asset quality would drive earning for the public sector banks. Overall, earnings growth for Sensex companies would be 10% to 12% this fiscal and trend higher in the next fiscal.
What do the recent macro economic data suggest about the economy in 2014?
Inflation levels remain high on account of food and fuel related inflation with core inflation being benign. Over the coming few months we expect food inflation to decline which would result in the headline inflation coming down at a rapid pace. IIP data continues to be weak over the last few months. However, we believe a gradual recovery in IIP growth is likely from the next fiscal. GDP growth has been supported by strong growth in agriculture and the services sector (which has been showing signs of deceleration). The key growth driver for the next fiscal has to be the corporate sector. We believe that interest rates have peaked and would tend to move south over the year. As rates would stabilise we expect the investment cycle that has been stagnant over the past few years to kickstart.
The US economy is seeing a revival and has led to the start of Fed tapering its QE programme. Do you see major risk to equity markets because of this?
We expect volatility on account of the Fed tapering programme to continue. Emerging markets are far better prepared for the Fed tapering this time around as compared with May 2013. Higher domestic interest rates and the depreciation in the currency would result in markets being comparatively stable. Globally, the fund flow trend from fixed income to equities is likely to continue, which should see continued FII flows into Indian equity market.
Which sectors are you betting on in the coming year?
We are re-looking at the sectors that would benefit from a turnaround in the investment cycle. Capital goods, industrials, power, etc would benefit to a large extent and a number of stocks have been beaten down over the last five years and are available at compelling valuations. Financials would also benefit from an uptick in the investment cycle. Improvement in the stressed assets of banks would provide an attractive investment in public sector banks.