Since the beginning of 2013, equity market has been extremely volatile, displaying vulnerability to various events and data points. While the broader market has corrected slightly, the erosion in value of some mid-caps has been unsettling.
This is exactly what individual investors are typically wary of. In our view, the market is in the process of adjusting to macro realities of steep deceleration in GDP growth, structurally high current account deficit, diminishing visibility of capex revival, slowing consumption patterns and stubborn interest rates. Cumulatively, this implies a further downward adjustment to corporate earnings (thereby market?s base) which had halted in the past six months. However, global sentiment has been positive with the US and European markets making new highs and portfolio flows continuing to pour in India.
The sharper-than-expected slowdown in economic growth (4.5 per cent in Q3 FY13) and a sustained moderation in core inflation are likely to prompt RBI to cut repo rate more strongly than earlier expected in H1 FY13. We believe there is credible possibility of the central bank cutting the policy rate by 25-50 bps over the two upcoming monetary meetings on March 19 and May 3.
The transmission of these cuts by the banks should provide some relief to the corporate sector. Albeit, this by itself will not be enough to entice the private sector to start considering new projects which requires a constructive policy intervention by the government in some key sectors.
With the country being warned of a sovereign rating downgrade by global rating agencies, the government is giving higher priority to containing fiscal deficit, reducing external trade gap and attracting portfolio inflows. This would likely mean that economic growth would remain sluggish in the near term and so would corporate earnings growth.
In such a scenario, equity market could exhibit weakness and remain volatile. However, benign liquidity conditions and stable environment globally and monetary easing domestically should prevent markets from correcting materially from current levels. In the medium term, equity market could start trending upwards leading the recovery in macro economic indicators. Over the next 2-3 years perspective, equity could be one of the best performing asset classes beating gold and debt.
Though currently may appear as an inappropriate time to invest, history is replete with instances of multi-fold returns being made by investing when economic cycles are at their bottom. Also, it is nearly impossible to time the market perfectly; rather patience and longer investment horizon has paid off most of the times.
A key reason why most retail investors don?t make handsome money in equity markets is that they respond to trailing returns, ie they join the party late. Another problem is their urge to make quick money (speculate) than invest in fundamentally strong companies. We believe that the best way for retail investors to approach equity investment is to follow credible research advice and systematic investment through mutual funds.
Our research advices investment in sectors that would be long-term beneficiaries of economic recovery, lower rates, resilient rural consumption and weak rupee. Such sectors are private banks, FMCG, IT firms and pharma sector. We also like unique themes having strong earnings growth visibility.
The author is head of research, India Infoline Ltd. (IIFL)