Start topping up portfolio on correction

January 15, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Indian equities have posted a good show so far this year with gains of around 5 pct. Receding euro zone debt worries and a stronger-than-expected growth in industrial production in November have strengthened investors’ sentiment. Food inflation continued to show a negative trend which also aided sentiment.

Industrial output rose 5.9 pct in November, compared to a revised contraction of 4.74 pct in October. Consumer goods put up a strong show while capital goods remained a dampener with the sector contracting for the third straight month, suggesting that the investment scenario had probably reached its lowest point. But there is still scepticism about whether it is the base effect playing out or outright questioning of data authenticity due to a wild volatility in figures.

Already, interest rate sensitive sectors such as auto, realty and banking surged on expectations that the Reserve Bank of India will reverse the interest rates cycle in the coming months to revive the slowing economy. We believe that the RBI may maintain status quo in the upcoming policy meet as it wouldn’t like to be seen acting in haste.

The BSE Power index lightened up the street with 8 pct gains during the week. Expectations of a positive outcome of the high profile meeting of the country’s leading power producers with the prime minister this month resulted in renewed buying interest in power stocks. The BSE Power index had underperformed the Sensex by 15 pct over the last one year and has been a consistent underperformer. The Power Index is trading at 2x P/BV and at 33 pct discount to its last three years average mean of 3x, which provides a margin of safety. Tata Power is our preferred pick in this sector.

The rupee advanced to a five-week high at 51.53 against the dollar on sudden improvement in risk appetite which helped boost demand for the rupee, especially with greater optimism over potential capital inflows, thanks to various measures taken by the government. The rupee is expected to touch 50.5 levels against the dollar in coming weeks.

However, it will be tough to secure more than a limited recovery in the near-term given the risk profile and uncertainties surrounding the economy.

The December quarter results season began on a weak note with Infosys management cutting its full year earnings and revenue guidance. In dollar terms, the management expects full year revenues to grow by 16 pct YoY. This translates to a flattish Q4 FY12. The reason cited for the low guidance is the slower growth in the developed world as well as euro zone troubles. TCS and HCL Tech will unveil their numbers on Tuesday. The stocks have reacted negatively post Infosys results and as such expectations are being tapered down. Having said that, the downside seems to be limited but the weakness is expected to prevail for a while longer. We believe that the rupee weakness has been fully captured in the stock prices whereas the business environment visibility especially in the euro zone is just about getting discounted post the Infosys management forecast.

Among other prominent names coming out with Q3 results this week are Jindal Steel & Power, HDFC Bank, Hero MotoCorp and Bajaj Auto, Reliance Industries, Wipro, ITC, Axis Bank, Jet Airways, Hindustan Zinc, JSW Steel, UltraTech Cement, Asian Paints, Zee Entertainment Enterprises and Godrej Consumer Products.

On the macro front, data on inflation for December is expected to be out on Monday which will again build expectation on the RBI’s likely policy stance at the third quarter review on January 24.

Coming to the market view for the coming week, Nifty could face some resistance at the current levels. The S&P’s downgrade of nine European nations will play out in the beginning of the week. The midcap stocks which saw a stupendous rally could see profit booking. Post the results and the monetary policy, the upcoming elections and global news flow would remain key drivers for the market in the near-term.

There is lot of money waiting on the sidelines which could drive the markets up swiftly in case of a turnaround and this was seen to an extent in the mid-cap rally last week. The government seems to have been proactive in communicating and there is  hope that with a possible political realignment post the Uttar Pradesh elections, there would be action on the policy implementation front.

I would suggest topping up of the portfolio on a correction as it seems we have seen the bottom, especially in the mid-caps where the markets had lost the sense of valuation.

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