The above-mentioned concerns restricted gains to just about 7% for the benchmark indices as compared to about 25% gains for markets like US. Developing markets, as a set, under-performed the developed markets by a wide margin.
Going ahead, there is some data about the initial phase of the Fed tapering. However, India has built a war-chest of about $35 bn recently, which has reduced rupees vulnerability to the same. The CAD has also reduced dramatically due to measures taken on gold imports and due to rising exports. On the other hand, growth and inflation remain concerns. There is uncertainty on the outcome of general elections. In such a scenario, which is fraught with concerns and uncertainty, one needs to look at the longer term rather than the immediate future. Also, a balanced portfolio approach is advisable as compared to a concentrated one.
We believe that, one should be exposed to both, the defensive and cyclical sectors. While the defensive sectors have better revenue visibility but have high valuations, the cyclical sectors have low visibility and are available at relatively low valuations. Within these, one should be focused on select stocks.
Within the defensives, we like select stocks in the IT, FMCG, Media and Private Sector banks. We are positive on the IT sector as it is expected to see improved demand as developed economies like US and Europe recover and stabilise. For consumer goods, consumption demand is still growing, though at a slower pace. Media sector is expected to benefit because of the digitization as well as higher political spending, ahead of the elections. We like private sector banks as these have relatively better asset quality as well as relatively higher margins. While we note that, valuations are generally on the higher for these sectors, we also believe that, one can find good quality stocks (including mid-caps) in these sectors, which are available at reasonable valuations.
On the other hand, we have a cautious view on the cyclical and investment-oriented sectors. The Government has announced some reform initiatives in the past few months. However, our interactions with managements indicate that, companies have not seen any major change in the ground realities. We believe that, effective implementation of the initiatives will result in better prospects for these sectors. Also, more initiatives need to be taken to revive investment interest. In these sectors, one should look at companies having credible managements and strong balance sheets. Companies having net cash in the balance sheets would be preferred as they will not be impacted further even if the economy recovers at a slower pace than expected. Moreover, they will benefit in case interest rates continue to rise.
The concerns over the next few months will be on the pace of the Fed tapering and on the outcome of the general elections in April May 2014. While an accelerated taper will impact liquidity flows into India, the absence of a clear mandate for any particular political party will be negative from the reforms perspective. This can have a bearing on the growth rates for the next fiscal.
By Dipen Shah, Head- Private Client Group Research, Kotak Securities
NOTE: The views expressed are those of the author