Downside Alerts

Sowmya Kamath        Print Edition: November 2012

It takes years to build a reputation and just one day to ruin it, a trait that also describes your portfolio. A few minutes in the wrong market can ruin a profitable investment corpus.

The rally in September, following reforms announcements, was backed by foreign funds but domestic investors stayed net sellers. This is clear indication that the market is divided. So, better lace market optimism with caution while FEAR (the) BEAR factors play out.

Fiscal deficit
Analysts estimate India's fiscal deficit is between 5.5-6.1 per cent against the budget estimate of 5.1 per cent for 2012-13. In order to reduce it, the Kelkar Committee report on fiscal consolidation recommended reducing subsidies across sectors, selling government land to raise funds, disinvestment and planning capital expenditures among others.

Earnings growth

Call the market short if
>> budget has heavy subsidies.
>> earnings growth is low.
>> inflation continues to rise to double digit.
>> there is a ratings downgrade.
>> Parliament does not clear bills on market reform.

Despite low expectations of growth, earnings will be a catalyst for market movement. A failure to meet expected numbers may trigger a sell-off. Estimates for the second quarter results indicate that top-line growth (gross revenue) and operating profits is still under pressure while net profits have been boosted by base effect owing to a favourable currency, indicates analyst report India Equity Strategy (October 2012).

U R Bhat, MD, Dalton Capital Advisors says: "Expected growth in corporate earnings has softened considerably and we are now talking of single digit numbers. Interest rates, and therefore return expectations, continue to be firm."

Aggravating inflation
The RBI is unlikely to cut policy rates with inflation still high. While inflation fell to 9.73 per cent in September from 10 per cent in August, the recent diesel price hike is expected to push it back to double digits. Higher crude oil prices and rising food prices are prominent causes. The government increases the minimum support price for agricultural products every year and this adds to inflation. "Under these circumstances, monetary action may only have a marginal effect on inflation. That said, it is possible that the government may prevail on the RBI to cut rates to improve sentiment," says Bhat.

Rating downgrade
Ratings firm S&P, on 9 October, warned there is a onein-three chance of a downgrade in the next 24 months. However, S&P also said there is a possibility of an upgrade if the government implements reforms and reduces fiscal deficit. A potential downgrade to junk status may imply a higher cost of borrowing for companies. The World Bank also cut India's growth forecast for 2012-13 to 6 per cent from 6.9 per cent citing corruption and uncertainty on implementation of policies.

Budget
Every budget, especially before elections, the government announces subsidies, putting further pressure on fiscal deficit. Harendra Kumar, MD, Elara Capital, says: "It should not be that the government mops up money from disinvestment and gives it as subsidies. Historically, we have seen government spending shoot up in an election year." The subsidy will be in three main areas-fuel, food and fertilisers.

Exiting foreign investors

The market may rise if
>> the National Investment Board is set up.
>> Applications for land acquisition are cleared.
>> there is a rate cut.
>> there is good retail response to divestment..

The market has gained over 23 per cent (in dollar terms) in 2012 (till September). This means that foreign funds that flowed to India have appreciated. If the macro environment worsens foreign investors may book profits.

Asset sale-disinvestment
The government has announced stake sale of four companies - Nalco, Oil India, Hindustan Copper and MMTC. In uncertain markets, investors might be averse to risk and FPOs might not have takers. The government aims to raise Rs 30,000 crore in 2012-13 from disinvestment. The government's 5 per cent stake sale of ONGC was a disappointment as retail participation was negligible. So far, the government has raised only Rs 125 crore through the sale of National Buildings Construction Company.

Reforms
That the government refused to roll back the fuel price hike despite popular opposition is a positive but there are yet bills to be cleared. Experts recommending beta stocks are betting a National Investment Board (NIB) will fast track projects valued at Rs 1,000 crore and above. Approvals for land acquisition and coal issue will also be expected.

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