AN observation of the day-to-day movement of the market during the last few sessions is indicative of the onset of a bull run. The government also seems to be doing everything right with the RBI going in for a thorough asset quality review of the banking sector that will strengthen the system to take up the challenges ahead – a concern I have been pointing out in most of my previous columns. With the budget mainly focusing on the rural sector and infrastructure, the Indian economy will be much better prepared to meet global shocks.
The global economy is recovering albeit weakly and may be subject to downside risks. The present government is credited with having achieved macro-economic stability, raising the threshold limit for FDI in various sectors and improving the business environment in general. Initiatives such as Make in India, Startup India-Stand up India, Skill India, Swachh Bharat, smart cities, and promotion of alternative sources of energy will considerably improve the competitiveness of the country.
However, the economy still suffers from low investment and the government needs to increase capital expenditure. Investment as percentage of GDP has been falling sharply, from 39 per cent in 2011-12 to less than 33 per cent in 2015-16. The savings rate has also declined and is currently in the range of 31-31.5 per cent of GDP. Though the economy has benefitted from low oil prices, the same has led to another curse wherein 7 million Indian workers from states such as Kerala who draw a major chunk of their revenues from remittances are staring at a bleak future. Remittances are getting choked due to falling oil prices resulting in mass job losses. It is worth noting that 96 per cent of annual labour exports from India are to the Gulf nations and only 4 per cent to the rest of the world. The country received remittances worth $69.8 billion in 2014-15.
The focus of the market will now shift to corporate earnings and interest rates. Given that a lot of correction happened due to lower than expected corporate earnings during the last many quarters, the earnings are likely to bottom out and there may be a pick-up from the first-second quarter of Fy16-17. Though the market has already discounted a 25 basis points cut by the Reserve Bank, any deviation may bring in a surprise for it. The valuations on the whole have started to look a bit reasonable, looking to the future. We have again witnessed some unseasonal rainfall that has damaged the winter crop. This may again pose a question mark on the revival of the rural economy and food prices and may make the job of the government more challenging. Overall, the worst seems to be over. The emerging markets per se have turned into favourable risk reward metrics and have started attracting increased FII flows. India stands much better relatively and is a sweet spot for world investors.
Investors are advised to take a long-term view of the market and invest in stocks that the Budget has focused on. The sectors that investors can look out for one cement, road construction, retail, private banks and NBFCs, urban consumption, and stocks that stand to benefit from government spending.
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.
