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Stay with 'Quality' in Indian Stocks
03/25/2013 7:00 am EST
India's stock markets are likely to remain choppy for some time as the country continues to grapple with economic issues including slower growth, writes Rebecca Bundhun of The National.
"Indian markets have become increasingly jittery of late, as investors grapple with the fact that data on growth momentum—both GDP and corporate revenue growth—remains very weak," said Nick Paulson-Ellis, the chief executive of Esprito Santo Securities in India.
GDP growth slipped to a decade-low 4.5% in the third quarter of the current financial year, which ends this month.
"Until the indicators of a bottoming-out of growth and green shoots of recovery become clearer, markets are likely to be choppy," said Paulson-Ellis. "And investors should be careful of expecting too many more reform rabbits up [the finance minister's] sleeve to offset disappointment in the actual fundamentals.
"Against that backdrop, we see no reason to change our mantra for the year: maintain a [high] 'quality' bias in portfolios and avoid trading down to second-tier names."
Measures taken by the government last September, including opening up the retail and aviation sectors to more foreign investment, helped to boost stocks in the months following the announcements. But the benchmark Bombay Stock Exchange (Sensex) declined more than 5% last month on weaker-than-expected corporate earnings.
Dhananjay Sinha at Emkay, a financial services company based in Mumbai, said challenges remained in India, including high leverage of corporations and banks and the country's gaping budget and current-account deficits.
"The steep run-up in benchmark indexes and feeble fundamentals is a paradox attributable to compression in global risks induced by excess global liquidity, which can be volatile," Sinha said. "Domestic announcements have been riding on the global liquidity spillover.
"We believe the market may be currently pricing significant exuberance or very strong rebound versus our expectation of a modest recovery. We remain conservative as we believe the inflection point from earnings downgrade to upgrade cycle is still away."
Other major risks India may face include a further hardening of crude oil prices and more financial volatility, according to Emkay.
The company said it was favoring technology stocks, including HCL (India: HCLT), Infosys (India: INFO), Tech Mahindra (India: TECHM), and MindTree (India: MTCL). It is also upbeat on power utilities, including Power Grid (India: PWGR), the private utilities KSKE and CESC, Indiabulls Power (India: IBPOW), and Reliance Power (India: RPWR).
Health care is another sector it labels overweight, mentioning Dr. Reddy's (India: DRRD), Wockhardt (India: WPL), and Sun Pharma (India: SUNP). In the media sector, also a positive focus for Emkay, it highlights Zee (India: Z), DB Corp (India: DBCL), and Jagran (India: JAGP).
Meanwhile, it is less bullish, or underweight, on metals because of "muted demand and adverse raw material supply conditions." Emkay said it was also cautious on telecom stocks because of high regulatory risks.
Indian stocks reacted negatively to consumer price inflation data released recently, which showed an acceleration of 10.9% last month compared to February last year. This has prompted some traders to lower their expectations for rate cuts going forward. However, higher than expected industrial output data raised some hopes that the economy might be turning a corner.
"Better-than-expected industrial production data has provided some cause for market cheer in India," said Aninda Mitra, the India economist at Capital Economics. "However, a close look at the data underlines how fragile the recovery remains. The momentum of the industrial recovery may already have peaked. Growth in capital goods production remains negative, suggesting that a long-hoped-for pickup in investment remains weak at best.
"Lackluster investment will weigh on India's first-quarter GDP growth, and does not help its medium-term prospects either. There are signs that the recovery in consumer spending may already be running into the sand."
Capital Economics is forecasting a rate cut for the next meeting. Espirito Santo Securities points out that stocks managed to rally last year amid unfavorable circumstances, but said there were other elements working in their favor at the time.
"Then again, economic fundamentals were weak throughout last year, but the market still rose 25%, in a rally built on a combination of global asset flows and reform momentum since Chidambaram took over as finance minister," said Paulson-Ellis.
"The global policy environment remains conducive to risk assets, suggesting continued flows into Indian equities," he added. "However, India was a disproportionate recipient last year. Now that it is no longer a big underweight in portfolios, specific country flows will depend on either continued momentum in public policy, or clear evidence of real economic recovery.
"Our sense is that while policy momentum on the interest rate side is likely, policy momentum in political reforms will become harder from here on."
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