th global growth looking up in 2013 and outlook for inflation benign, we can expect more portfolio flows into India

Nirmal Jain / Feb 04, 2013, 00:40 IST

The revived fortunes of the Indian stock market since September 2012 is likely to witness an extended run. Already, 2013 has commenced on a high with $4 billion net foreign institutional investor (FII) investments in January. A couple of surprises have added to the cheer. One, Infosys has marked a festive start to the corporate results season with robust Q3 numbers. And the other, the Reserve Bank of India ( RBI) governor pleasantly surprised with a 25 basis points (bps) cut in cash reserve ratio along with the widely expected 25 bps cut in repo rate.

The Nifty, however, consolidated for the major part of the month with continuous unwinding pressure around 6,100. This was largely expected, given the spectacular run since the last few months. Probably, domestic institutions would have triggered the supply in anticipation of the forthcoming government issues or for better opportunity as retail participants have not yet made their presence felt.
With global growth looking up in 2013 and outlook for inflation benign, we can expect more portfolio flows into India. While the rupee carry trade favours FII investment, the nod for foreign direct investment in select sectors makes the scenario even more conducive. The upcoming Budget in all probability will be balanced. The finance minister will have to focus on controlling revenue expenditure and subsidies on one hand, while emphasising on reforms on the other. Disinvestment is likely to remain the focal point. Exports may get a boost with extended sops. I believe, the Budget will steer clear of ambiguous provisions to safeguard positive investor sentiment and emerge as a key trigger for markets.
On the interest rate front, I expect a 100 bps repo rate cut in 2013. The RBI governor has already made a beginning. Some optimists even hint at a 150 bps drop, but that would depend on a structural fall in inflation. We could see a steeper rate downcycle if the monsoon is supportive and crude prices drop $20 per barrel in 2013 on multi-year high gas production in the US.
The market is readying itself for another leg up. We expect the government policy action to continue, given the looming risk of country downgrade on the high twin deficits.
Market valuations seem supportive at 14.5 times FY14 estimated earnings. One can estimate EPS for Nifty with reasonable surety given the waning earnings downgrade cycle and FY13 projections already trimmed by 18-odd per cent. The recent carnage in mid- and small-cap stocks only reinforces the on-going sectoral shift back in favour of index heavyweights ahead of the Budget. I expect Nifty to trade in a broad range of 5,750-6,350 in the next couple of months.
Selective equity allocation at current levels should prove rewarding. Investors should focus on fundamentally strong scrips in promising sectors, including pharma, banking, info tech and cement. Besides, upstream PSU oil and gas companies as well as refining and marketing companies should do well as reduction in subsidies on diesel and gas will ease their cash flow and improve profitability. The PSU oil and gas sector valuation is also very attractive. A prudent, bottom-up approach to investments will open a credible window to equities.

---