Fears of QE tapering from the US Federal Reserve, earning downgrades, hawkish stance by the Reserve Bank of India (RBI) and sharp depreciation seen in Indian currency have all weighed on investor sentiment.
However, there was some good news for investors in the current results season. After five quarters of earnings misses, weaker currency helped Sensex profit grow marginally ahead of estimates at 14.5 per cent while sales grew by 15 per cent.
Number of things happened globally such as recent reforms announced by China and dovish stance by US Federal Reserve is likely to boost the liquidity-led rally in emerging markets including India.
“A number of things, which took place recently, have boosted the market sentiment, both globally and more importantly, for China, within the emerging markets context. It is now apparent to the financial markets that a Janet Yellen-led Fed will, in all likelihood, be dovish for longer,” said Stefan Hofer, Emerging Markets Economist, Bank Julius Baer.
“Now finally, with some positive catalysts coming out of major markets like China and a renewed optimism regarding India, things have started to look a little bit brighter for 2014,” he added.
On the domestic front, anticipation of a BJP-led government or a stable government in 2014 is building some bit of optimism among market participants, which can lead to restarting of investment cycle, experts feel.
Improving the investment environment will not only attract FDI to help offset current account deficit but will also bring back domestic private sector capital expenditure.
According to a report published by CLSA, FIIs have funded nearly 34 per cent of India’s current account deficit over FY10-13.
Hofer is of the view that the twin deficits are well known facts by the markets and are certainly not new developments and financial international investors are very excited and motivated by the new policies that have been unveiled by the new central bank governor, Raghuram Rajan.
Mahesh Nandurkar of CLSA is of the view that Rajan’s rupee-boosting measures have also given confidence to FIIs. Along with that, hopes of growth bottoming in India and improving chance of the BJP coming to power have triggered improved equity flows in India since September.
FII portfolio flows (debt+equity) accounts for almost 34 per cent of India’s capital flows every year. India has been a big beneficiary of robust FII flows during FY08-FY13, netting $120 billion, said a CLSA report.
A K Prabhakar, independent market expert, is of the view that once elections are over, investment cycle is likely to kick off as it will bring more clarity towards policy and reforms. Adding to that, reforms process which was initiated in the last one year would bear fruit in the next 1-2 quarters.
On the monetary policy front, Prabhakar expects the hardening of interest rates is likely to end soon with another 25 basis point hike.
What should investors do?
Benchmark indices have been nothing but volatile so far in the year 2013 without any clear direction. But it’s prudent to accumulate stocks on every dips, experts say.
For long-term investors, analysts feel that they can still enter markets for a long term. Most international brokerages have been quick to jump the gun and are already eyeing levels of 22,000 by this year-end.
Earlier in the year Deutsche Bank raised its December-end Sensex target to 22,000 from 21,000 earlier. While Nomura eyes the same target by end-March 2014.
As the market witnesses a phase of consolidation, Madhusudan Kela, Chief Investment Strategist of Reliance Capital feels that it may be a good time to enter stocks. “Investors should start to bet on stocks affected by economic recovery,” Kela advises.
In an interview with ET Now, Kela said that investors should take a 3-5 year view when entering the market. “Investors should use a stock-specific strategy to invest.” He further advises investors to have a balanced portfolio.
Strong equity returns of the past two years have been driven by multiple expansions at a time of near-zero earnings growth. With QE coming to an end, analysts expects further rise in PE; however, upside to equities will be limited to earnings growth.
“We don’t expect a bear market, but 2014 may be a lacklustre year. The next leg-up has to come from earnings growth. We think earnings can grow next year in line with the consensus forecast of about 11, as global economic growth picks up a little from the intra-cyclical slowdown of the past 12 months,” said Garry Evans of HSBC.
Investors should look at stocks where earnings growth can surprise on the upside.
The midcap space in technology looks very attractive as most large-cap stocks are trading at the higher end of their valuations.
Rakesh Arora of Macquarie is of the view that the market has more steam left. The market has consolidated with positive quarterly results and a re-assuring statement from US Fed.
“State elections and RBI monetary policy are big events due in December, but it’s too early to get nervous. Hold on to your longs,” he added.
Stocks and sector to focus in 2014
While the near-term outlook for corporates earnings and an investment cycle is not very strong, analysts feel a long-term investor will find attractive entry points in select cyclicals.
The valuations of cyclicals are currently 23 per cent below their long-term averages, CLSA said in a report. The global brokerage firm is of the view that valuation gap between cyclicals and defensives is also currently very high.
Defensive stocks are trading at a 131 per cent premium to the valuations of cyclicals against an average of 59 per cent over the past 10 years. As clarity on revival of an investment cycle emerges, this valuation gap should soon narrow over a period of time, added the CLSA note.
Jigar Shah, Senior VP and Head of Research, Kimeng Securities, is of the view that the midcap space in technology looks very attractive. Some of the stocks that we like include CMC, KPIT, and Hexaware. These are some of the names which we think are very attractively valued.
“Frankly speaking, there is little room for the price earning ratio to improve for FMCG and consumption theme. In fact, there is a room for downside if there are disappointments,” he added.
Shah is of the view that consumption space will continue to occupy an important position and some of the companies, for example Tata Global Beverages or Jyothy Laboratories that we like, have good scope to improve margin because of the internal restructuring of the business that is taking place.