*The market's looking up* Prateek Agrawal / DNA Source: http://www.dnaindia.com/money/report_the-market-s-looking-up_1280322
The stock market indices have been registering new highs and the question now is on the direction of the market and the part of the market that may perform. We are optimistic on the direction of the market and believe that over the next three to four months, the chances of the market being higher is greater than the chances of it being lower. We build our case as follows: There are indications that the global economy is stabilising and may start on the growth path in the last quarter of this calendar year. Several indicators point to this -- risk appetite is improving (decline in dollar index is expected to increase cross border flow of money from US), bond spreads have started to decline, currency markets are stabilising and interest rates have come back to lower levels on a global basis. Credit markets are showing signs of opening up, while the new equity issuance market has been strong. The first quarter earnings season has delivered better-than-anticipated results. This is important because we believe it would trigger an earnings upgrade cycle which would provide support to the market. Last year, delivered EPS on the Sensex was around Rs 920 and FY10 EPS can now be projected to be between Rs 950 and Rs 1,000. This is being revised upwards with earning upgrades coming in, thereby making the valuations look more reasonable. In terms of valuations, the market is trading close to the mean levels that it has traded over the past several years. Considering that this period would see growth accelerating, we believe higher valuations can be sustained, especially in a scenario when interest rate and inflation would remain benign. *Fall and recovery *In CY09, the world economy is expected to contract by an estimated 2%, while in CY10, it is expected to grow by around 1.5%. This changeover from de-growth to growth is expected to take place between September and December 2009, primarily because the US economy is expected to stops contracting and re-commence growth. This, we believe, would be positive for the commodity space. Capacity utilisation levels should also improve, going forward. Moreover, we also believe the inventory de-stocking cycle in the west would come to an end. Several industries, notably metals and auto, have seen capacity utilisation levels fall by over 30% in various geographies. This clearly is on account of de-stocking, because the overall fall in GDP growth is significantly below this number. A reversal of this phenomenon would also help growth momentum and increase profitability as there would not be a subsequent increase in fixed cost. This gives us a broad theme. We are focusing on commodity and auto companies which may benefit as capacity utilisation levels improve. Insurance flows would commence from October, which would provide further support to the market. Moreover, the trend in FII flows has also been encouraging. The strong new issuance calendar is taking away liquidity that could have come to the secondary markets and is acting as a dampener to the momentum. However, the new issuances are also improving the balance sheet quality quite significantly and the degree of downside in the overleveraged part of the market has reduced. *Driving India *Infrastructure, consumption and exports are the three engines that are seen driving the Indian economy. The government is making encouraging statements on infrastructure spending. It aims to achieve an infrastructure spend of around 9% of GDP versus around 5.8% currently. The surface transport ministry proposes to accelerate road building. While the Budget disappointed, the steps taken by the government in terms of disinvestment and providing incentives to housing sector have again focused attention into this space. Housing and infrastructure creation are two large areas which have capacity to absorb large amounts of money and create jobs and growth, going forward. The major driver of the consumption theme is interest rates. With the reduction in interest rates for lending to housing and auto sectors, we have seen demand pick-up in both of these categories. Auto sales have been increasing at a fast pace. Housing demand has been strong for projects that have come at lower price points. Exports are still an area of concern. However, October-December period of 2008 was the worst period for exports (in terms of growth) and since 2009 has seen revival and inventory restocking, export performance may also be positive. Hence, we expect the economy to be doing well in the period beyond October 2009. The economy is already showing signs of improving. The next 3-4 months will be the sweet spot in the market, wherein all the stimulus being provided globally would also continue, beyond which some countries may begin to withdraw their stimulus. In the Indian context, we do not expect stimulus measures to be withdrawn before the next Budget. One question to be addressed is that of interest rates in India. The concern is that if the government borrows as heavily as is indicated in the Budget, interest rates would harden. We believe that while this is possible, there may be a way out and a scenario that the market is probably not discounting. We believe if the Reserve Bank is able to mop up dollar inflows into the country, it would release liquidity into the system preventing interest rates from going up. This may also keep currency rates more stable. Possibility of reserves increasing is high because India has turned into a current account surplus country again. We believe the global environment is conducive for equity market performance. We expect inflation and interest rates to remain low globally over the period, and believe the risk aversion is reducing, which will increase the flow of global money to emerging markets. Recovery is expected to start in the US in the last quarter of this calendar year. Calendar 2010 is expected to be the first year of growth for western companies. We believe that in the above context, equity as an asset class should outperform other asset classes. In India, we believe that the markets would be presented with a better set of fundamentals in terms of historic earnings, inflation and interest rates as well as expected future earnings in September 09 versus September 2007 (before the crisis). This being so, we expect the market to be up over the next 3-4 months. *The writer is head-equity, Bharti AXA Investment Managers* Regards, Hiral Thanawala --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
