Core sector strength vital for markets

The markets have been range bound post-Budget, but with a positive bias. Expectations from the Budget were very high, especially after the finance minister initiated various reforms ahead of the annual exercise. In contrast, post-Budget, global markets have turned volatile. While the Dow Jones has touched its all-time high, the Chinese markets have fallen on concerns surrounding the property market regulations. As in the past, global events will continue to impact the Indian markets. The events to look out for are political developments in Italy, resolution of the debt ceiling issue in the US and provision of any stimulus by the Chinese central bank.

On the domestic front, the immediate focus of the markets will be on the Reserve Bank of India's (RBI) policy meet on March 19. We expect RBI to reduce interest rates by 25 basis points on Tuesday, with a view to support growth. While the index of industrial production has shown some improvement in January, it has remained under pressure over the past several months. Core inflation has come off to below four per cent in February but at the same time, CPI inflation continues to rise. In the Budget, the finance minister projected a lower fiscal deficit for FY13 at 5.2 per cent and is aiming for 4.8 per cent in FY14, in line with the commitment he had made earlier. RBI's view on further reforms and the consequent achievability of the fiscal deficit target, will determine further interest rate actions over the next few months, we believe. Most of the revenue estimates are achievable, though a few of the assumptions carry higher degree of uncertainty.

Over the medium term, the markets will focus on further fiscal initiatives by the government. The focus of the Budget was rightly on growth and hence, investments. The growth in gross domestic product in the December 2012 quarter has come in at 4.5 per cent, the lowest in the past decade. Various capital goods and infrastructure companies have indicated significant slowdown in order bookings. Credit growth for banks is also at about 16 per cent year-on-year as on February 22, 2013. These reflect the slowdown in the economy, especially in the core sector. Further initiatives in areas of land acquisition, mining, power (fuel linkages, rate increases and restructuring of discoms) and GST, will be the ones to watch out for. Faster clearance of projects through the Cabinet Committee on Investments will also help encourage investments and bring more funds into the infrastructure sector.

From the market perspective also, reforms are very important. The government has already announced several reform initiatives over the past six months. These need to be implemented without delay, something that the market will keenly watch. We believe, while these reforms have improved the sentiment, more initiatives in the core sector are a pre-requisite for the markets to trend up sustainably.

In terms of valuations, Sensex is quoting at about 14.5 times FY14 consensus earnings estimates, which is near the long-term average. An improvement in growth rates will lead to higher earnings for companies and will likely provide support to the valuations.

The author is head of private client group research, Kotak Securities