The New Year began on a shaky note on Dalal Street. After rising for three consecutive weeks in December, stock markets witnessed volatility in the first week of January, with the Sensex and the Nifty declining 4% and 3.7%, respectively.
The instability was largely due to skyrocketing inflation. Food inflation during the week rose to 18.3% as compared to 14.4% in the last week of December. The IIP numbers too were not encouraging. Industrial growth plunged to 2.7% in November as compared to an expansion of 11.3% in the same month a year ago. The pulling out by FIIs and a hike in interest rates by the RBI still remains a concern.
Though the medium- and longterm prospects continue to be positive, analysts believe that the markets might face some near-term headwinds. Also, volatility may persist for some time. Since it isn't possible to control the market sentiments, it would be better to focus our attention on the sectors we are invested in. This would give us a more accurate picture of the growth prospects of the Money Today-Value Research model portfolios. Stable Growth has given a 1.4% return since its inception in May 2010.
The low-risk portfolio has the highest equity allocation of 19.32% in the financial sector. Though the sector growth has been steady in the past year, recent issues, such as tight liquidity and hike in key policy rates by RBI, have somewhat hurt its performance. However, according to Sharekhan, banks are expected to post strong growth in their net income in the third quarter. This would mainly be driven by an increase in the credit growth along with a rise in the prime lending rate.
- The Union budget in March will be crucial in giving a direction to the market.
- With increasing inflationary pressure, a further rise in interest rates by the central bank will have a negative impact on the rate-sensitive sectors.
- The third-quarter result of the manufacturing sector is likely to reveal tight margins due to high input cost.
Sharekhan also predicts the profits will go up by 22% on a year-on-year basis, led by a strong growth in their net interest income. With 13.3% of equity fund allocation, energy is the second most important sector in this portfolio. Brent crude oil prices crossed $94 per barrel in December, primarily led by the positive outlook on global demand and a weak dollar.
Also, the Singapore GRM (gross refining margins) remained strong at $6.3 per barrel. Motilal Oswal expects the higher GRMs to benefit global scale refiners, such as Reliance Industries, the most. Also, it expects petrochemical companies to continue to perform well. Overall, Motilal Oswal remains positive on the sector's growth.
Technology is another important sector with almost 11% of equity funds parked in these scrips. Prabhudas Lilladher expects the overall demand of the Indian IT sector to strengthen in the next financial year. They predict it to be led by factors such as an uptick in the IT budget by 1-2% in March, increase in market share and strong deals in the near-future.
The company continues to remain positive on this sector and expects the volume growth of top IT firms to be as high as 30% on a year-on-year basis for the financial year 2012-13. The other three portfolios also performed fairly well. Both Wealth Maximizer and Money Builder gave a return of 1.2%. Their returns were affected by the short-term volatility but are expected to get back on track once the markets stabilise. With 4.4% return, the Income Generator gave the highest return. We will examine this portfolio in detail in the next issue.