There is now a higher probability that the CAD for FY14 would moderate much below the governments estimate of $70 billion. The risks surrounding the financing of CAD have also materially subsided. The perception of risk has altered owing to: the improvement in the quantum of the deficit; continued global liquidity; measures taken by the government to augment capital flows by liberalizing FDI and FII norms; and the RBI's steps to attract debt and NRI deposit inflows in the economy.
On the global front markets are slightly unnerved by the partial government shutdown and the issue of raising the debt ceiling, in the United States. The political brinkmanship between the Republicans and Democrats and their failure to reach a compromise on these issues is making investors jittery and risk-averse in the near-term. But eventually, I believe that despite their differences, policymakers would take mature decisions and through negotiations avert any catastrophic impact on global financial markets and economy. Earlier too, policymakers in the US had clinched last-minute deals on contentious issues such as raising the debt ceiling during August 2011 and the sequester issue during March 2013.
As for the monetary stimulus, a gradual withdrawal of the Feds bond purchase programme appears inevitable in the next three-six months. In this regard too markets appear to be better prepared now. The Indian economy seems much more resilient now to deal with the ebbing global liquidity as compared to May 2013 when a Fed indication of tapering led to a rout in the Indian forex market and volatility in the equity market. The good news is that policymakers are focusing on correcting imbalances and bringing about a sustainable level on current and fiscal deficits to restore macroeconomic stability.
The recent positives have resulted in FIIs pouring $2 billion in India's equity markets since September 2013 after three straight months of net FII equity outflows. Notwithstanding the liquidity situation or the current macro situation, I believe the Indian economy would continue to attract strong capital inflows because it is a growth-oriented market with high potential and hence we would continue to remain attractive to long-term FII investors.
On the domestic front, at least some positives are slowly but surely shaping up. The Indian rupee has strengthened by about 10% from its all-time low. But on an average, the INR is still likely to be lower than the previous fiscal year and coupled with the recovery in advanced economies, it is likely to bolster export growth. We have witnessed strong double-digit growth in exports for three straight months in July, August and September 2013. I believe that a double-digit export growth run rate, given the weightage of value-added exports in the economy, of at least about 16% could potentially add about 150-200 basis points to the overall GDP growth. Now, this would in turn trigger a virtuous GDP upgrade cycle as investments also start picking up.
The anticipated pick-up in agricultural growth is another reason for optimism. Good monsoons are expected to boost agricultural production. Going ahead as the kharif harvest season progresses and the crop enters the market; I believe that food inflationary pressures are likely to ease substantially. At the same time, rural consumption demand is likely to prop up demand for FMCG products and consumer durables, including demand for two-wheelers and tractors.
But all is not hunky dory yet. With the spike in headline WPI inflation and elevated CPI inflation, the RBI is likely to remain cautious, and interest rates may not decrease as much and as soon as anticipated earlier. On the investment side, the outlook is likely to continue to remain lacklustre until the elections are over. It is likely that investments in new projects take a back-seat until there is greater clarity on the policy side post-the general elections. That said, I believe that irrespective of the electoral outcome, the new government would focus on instilling business confidence and enhancing capex to revive economic growth.
Owing to the near-term cyclical headwinds, the outlook for growth in corporate earnings in rate-sensitive sectors during FY14 is muted. Despite stocks in rate-sensitive sectors trading at attractive to beaten-down valuations the outlook for their earnings growth continues to be muted in the absence of positive catalysts. In the case of high-quality companies in the cyclical space, retail investors would be well advised to approach the market with an investment horizon of about 18-24 months.
In this scenario, I would advise investors to stay in defensives. I continue to be over-weight on export-oriented sectors like IT and pharmaceuticals. Im positive on the metal space as well. I believe that the recent capacity additions and meaningful under-utilised capacity in the metal sector are likely to be employed for a sharp increase in exports, aided by the improving global fundamentals. Although expensive, defensives like the FMCG sector are also likely to continue to outperform in the current environment. Overall, given the healthy weightage of these sectors in the Sensex and the improving macro factors, I expect the Sensex to make a new all-time high in the near future.
The author is chairman and managing director, Angel Broking