Calendar 2013 yielded marginal gains for the benchmark indices (BSE Sensex and NSE Nifty) even though there was significant volatility during the period. The major factors which influenced markets were the Fed taper concerns, rupee weakness (it has recovered from the lows, though) inflation / interest rate concerns and finally, expectations on the political front. Slowing growth also kept market sentiment subdued. Within this, defensive sectors did well. However, the cyclical and investment-oriented sectors suffered due to lower growth and rising interest rates.
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 rupeeís 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