The recent stock market correction can be attributed to many factors, prime among them being an excessive stock price run-up in a short period, the mixed bag of Q2 FY10 results and concerns on the anticipated monetary contraction in the near future.
At the time of writing my article in October 2009 Money Today issue “Bottom up Strategy pays”, I had estimated a mere 6-7% nifty upside in the near to medium term (Nifty @ ~4800 then) while hinting at an imminent correction. This correction notwithstanding, the ample liquidity today leaves little room for any major slide. Precisely why Bottom up and on-dip buys still hold good.
Indian equities show great promise, thanks primarily to the following:
Institutional ownership is still significantly off its historical levels. The waning risk aversion strategy is driving huge capital flows into Emerging Markets (Ems).
The FII story has been nothing short of inspiring. Their YTD net equity buys at US$14bn has already exceeded their net selling of US$13bn in 2008. The Foreign Direct Investment (FDI) flows too, have remained pretty strong with 2009 YTD (up to Aug 09) inflows standing at US$20bn.
Even if the monetary policy is tightened, most likely from March 2010, there is enough liquidity in the system at over Rs1,000bn under the daily LAF. The domestic money market liquidity remains plentiful. No wonder, the incremental Loan-Deposit ratio has dropped to 40% - the lowest in six years.
While the IIP growth has recovered to 10%, the exports traffic growth is back on track after a gap of six months. Auto sales are steaming at 15-20% YoY and the overall consumption momentum, notwithstanding sub-normal monsoons and floods, remains noticeably buoyant. The strong industrial recovery looks all set to cause an upward revision in GDP growth estimates.
The best thing that Indian companies have done at the first sign of liquidity ease has been to improve their balance sheets. Indian companies together command an YTD ~Rs800bn of risk capital with QIPs accounting for the largest chunk YTD. It’s interesting to note that the capital raised through QIPs is almost the same as that raised during the full year FY08.
The consensus predicts a double digit BSE100 EPS growth for both FY10 and FY11. This is not an unrealistic expectation in our opinion.
The Emerging story
While we are still circumspect on the fortunes of the world economy, particularly US, most indicators point to a strong recovery phase...factors like the healthy rebound in global trade, V-shaped revival in industrial activity, reflating asset prices and substantial upgrades in GDP growth estimates.
EMs are a step ahead and have witnessed a strong pick up in employment and consumption. This should definitely drive a quicker and sustainable growth turnaround. And the recent rally in commodity prices has added to the lustre of EMs.
Value in non-index counters; keep an eye on global markets
The only thought that one should carry at back of the mind is that current valuations are neither expensive nor low. And as far as index stocks are concerned, there’s little to choose from. Barring materials, all Indian industry sectors look expensive when compared to their EM peers.
There is value in many mid-caps, which are trading at a larger-than-average discount to large-caps. However, one should watch out for any negative global trigger that may cause a slide. If that happens, the midcaps may correct more than their larger peers. As of now, the liquidity is strong and the environment is conducive to investment.
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