Global markets ended on a positive note in February. Despite tepid economic data-points and continued withdrawal of monetary stimulus, the US markets inched up on Fed's comments that it would maintain its soft interest rates policy well past the level of 6.5% unemployment. Economic data was weak largely as a consequence of inclement weather. Indian equities also ended higher but underperformed the US and European benchmarks.
On the domestic front, IIP continued to stagnate. While the CPI and WPI inflation declined in January, the manufacturing (core) inflation remained resilient and even inched upwards. Unless manufacturing inflation reverses its upmove, the RBI may not go for a rate cut when it meets next, we opine. On the external front, the trade deficit narrowed to $9.9bn in January 2014, helped by a sharp drop in imports and a modest rise in exports. The FM presented the interim budget which, by convention, was bereft of any major initiatives, save for excise duty reductions in Auto and Capital Goods.
The scenario in US, Europe and Japan is expected to remain benign whereas, Chinese economy may start reviving after sluggish growth in past few months. On the monetary policy front, RBI may be on an extended hold. Russia / Ukraine are the concern areas, though.
Markets will continue to closely watch the developments on the political front. Markets are betting on formation of stable government, which could put the infrastructure and industrial sector back on track. This will provide higher visibility to cyclical / investment-oriented sectors and will also give an upward bias to the current valuations of 14.5-15x consensus FY15 earnings, we believe. Over the medium-to-long term, initiatives to revitalize infrastructure investment, anchor inflationary expectations and control the ballooning subsidies, will be important pre-requisites for the markets to move up sustainably.
We continue to recommend a selective and balanced approach towards sectors. We do like select stocks in sectors like IT, media and private sector banks. However, we also recommend investing in stocks having strong balance sheets and ethical managements in beaten-down 'domestically-oriented' and 'investment-led' sectors. A favorable political outcome will lead to out-performance from these sectors / stocks vis-a-vis the markets.
Key risks to our recommendation are political uncertainty, geo-political concerns globally (Russia/Ukraine), decline in foreign inflows, sharp currency depreciation and spike in oil prices.
By Dipen Shah, Head- Private Client Group Research, Kotak Securities