The world economy is still showing prominent signs of recovery. The woes of the US may be far from over, but at least there's no likelihood of any new devils threatening to weaken the economy that is convalescing slowly but steadily. Among the high-flying markets other than those in the West, China continues to lead the pack. Its exports have grown dramatically, auto sales have been phenomenal and overall consumption is at a new high. We firmly believe that the fears of a worldwide stimulus withdrawal spree are overplayed, if not unfounded. Indeed, China has hiked the reserve requirement ratio by 50 basis points, but we do not reckon this to be a serious monetary squeeze.
Back home, there's ample liquidity in the system. Mutual funds are rolling in cash and the Ulip collection for the last quarter has been noteworthy. Even if the RBI tightens rates, it will be done in a phased manner, with ample liquidity and relatively low credit growth. This is not expected to trigger a hike in lending rates.
More importantly, the economic and financial indicators have been promising. The index of industrial production and gross domestic product figures have been strengthening, while the budget is expected to be 'pro-growth'. The current stability in Indian polity signals a momentum for economic progress. Indian corporates have strengthened their balance sheets. The third quarter results for the Sensex companies are expected to show a growth of about 25 per cent in profits. Positive Infosys numbers are the harbinger of good times for the information technology (IT) industry and the outsourcing market. The world recession is now expected to force many overseas bigwigs to outsource their IT and business process outsourcing (BPO) operations faster than before.
Inflation is on its way up, but if interest rates don't rise as fast, it will spell good news for stocks. Even though valuations don't appear attractive for the Nifty companies, some may be re-rated on better-thanexpected results. There has been a renewed focus on mid-caps and these may witness increased money flow. Even hedge funds, which had turned their backs on this category, have shown renewed interest. This year is expected to see a surge in bottom-up picks trading at relatively attractive valuations. Many areas, such as consumption theme, infrastructure-related stocks, auto ancillary, IT and metals are expected to witness heightened interest.
Overall, the markets are expected to be volatile in the medium term, so bottom-up and on-dip buys still hold good. A minor correction apart, the ample liquidity today leaves little room for a major slide. The economic growth, backed by liquidity support, should see us through the coming months. However, look out for some eventualities, the prime among these being a faster-thanexpected RBI exit policy, a rise in crude oil prices and disinvestment-led liquidity evaporation from the secondary market.
Amar Ambani is Vice-President, Research, India Infoline