Markets poised to surge ahead

The recent stock market correction can be attributed to many factors— excessive stock price run-up in a short period, a mixed bag of second quarter results and concerns about the anticipated monetary contraction in the near future.

In my previous article, ‘Bottom-up Strategy Pays’ (October 2009), I had predicted a mere 6-7% upside for the Nifty in the near to medium term (the Nifty was around 4,800 then) while hinting at an imminent correction. The correction notwithstanding, the ample liquidity leaves little room for any major slide. This is precisely why bottom-up and on-dip buys still hold good.

Indian equities show great promise, mostly due to liquidity, industrial growth and strong financials.

Liquidity: The waning risk aversion is driving huge capital flows to emerging markets. The year-to-date (YTD) net equity buys worth $14 billion by foreign institutional investors have already exceeded their net selling of $13 billion in 2008. Foreign direct investment flows have also remained strong, with 2009 YTD (till August) inflows at $20 billion.

Even if the monetary policy is tightened, there is enough liquidity in the system at over Rs 1,000 billion. It’s no surprise then that the incremental loan-deposit ratio has dropped to 40%, the lowest in six years.

Industrial growth: The index of industrial production has recovered to 10% and exports growth is back on track after six months. Auto sales are steaming at 15-20% YoY and the overall consumption momentum remains buoyant. The strong industrial recovery looks all set to cause an upward revision in GDP growth estimates.

Strong financials: At the first sign of easing liquidity Indian companies have improved their balance sheets. These companies together command around Rs 800 billion of risk capital (YTD), with QIPs accounting for the largest chunk. The capital raised through QIPs is almost the same as that raised during 2007-8. The consensus is that there will be a double digit EPS growth (for the BSE 100) in 2009-10 and 2010-11.

The emerging story: Most indicators point to a strong recovery phase. Factors like the healthy rebound in global trade, revival in industrial activity, reflating asset prices and substantial upgrades in GDP growth estimates point towards a robust recovery. The emerging markets have witnessed a strong pick up in employment and consumption and the recent rally in commodity prices has added to their lustre.

Value in non-index counters: Current valuations are neither expensive nor low. As far as index stocks are concerned, there’s little to choose from. Barring materials, all Indian industry sectors look expensive when compared with their emerging market peers.

There is value in many mid-caps, which are trading at a higher-than-average discount to large-caps. However, watch out for any negative global trigger that may cause a slide. If that happens, the mid-caps may correct more than their larger peers. As of now, liquidity is strong and the environment is conducive to investment.

Amar Ambani is Vice-President, Research, India Infoline