Signs of turnaround

THE opinion polls so far have predicted that the Narendra Modi-led BJP is likely to be the single largest party in the general elections to be held in April-May, 2014. The BJP with its allies forming stable government can be the best case scenario for the market that will attract foreign institutional investors (FIIs) in hordes despite tapering fears. Otherwise too, the slight moderation in the bond buying programme of Fed has not had any significant impact and FIIs have, by and large, been sticking to the Indian market. However, the recent upset made by the Aam Aadmi Party (AAP) in Delhi can change the scenario on the national front as well. A fractured and uncertain verdict will be the worst news for the market as heightened uncertainty will take a heavy toll on the economy.

However, things have otherwise started improving for the economy with the current account deficit (CAD) down. The currency crisis appears to be over and the same is reflected in the return of FIIs to the debt market. Though rising yields in the US may revert flows but the impending hikes by the RBI in repo rates may see the flow continuing for some time. The good monsoons have started showing its impact on food inflation coupled with lower imports; the overall inflation has started moderating.

Growth is, however, likely to remain slow due to tight liquidity and low business confidence levels in the private sector hampering new capex initiatives. Stretched government finances and the need to contain the fiscal deficit will further weigh on growth.

Valuation wise, the Sensex is trading at around 14 times forward earnings of fiscal 2015 and at around 16 times fiscal 2014 earnings; this can, at best, be described to be reasonable. There may not be an immediate sharp upside, but the market has a tendency to discount the future fairly in advance whenever some significant developments such as formation of a new government or the like happen. Also, the fact that both individual and institutional domestic investors are massively under invested in equities, a bull run may just be waiting to happen. Added to this, most of the sectors have shown muted growth and are likely to see a major turnaround.

Investors will do well to pay attention to sectors that are yet to participate in the rally and ignore those that have already run up a lot. On this count, capital goods, infrastructure and cyclicals need to be looked at closely since as soon as capex cycle begins to pick up momentum, these sectors are likely to outperform for at least 2-3 years. Select individual stocks on their strength ignoring the Sensex levels that is near its all-time high and buy on dips.

The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to editor@gfilesindia.com with Bhardwaj’s name in the subject line.