Markets eye next set of triggers

Given the recent rally, one can expect some correction, which would be healthy for our markets in the long run. Global markets could also play spoilsport

I don’t see the markets jumping too much higher, as the Street is awaiting news from the winter session of Parliament and Budget thereafter (populist or reformist)

There have been encouraging signs due to the reforms process getting back on track. But the changes made in various sectors (aviation, retail) will take time to bear fruit. While the start of the process is good news, has there been progress on fiscal deficit or inflation? The answers to both these is a negative. And progress in this direction is what the markets will be looking at. If the government continues on this path, it will keep the markets buoyed as everyone will be expecting more, especially on divestments and fiscal deficit.

What could propel it over 6,000 points on the Nifty is a stimulus package from China. If growth comes back to China and the China-Japan dispute dies down, it could propel global markets and in turn lead to more flows into India. The rupee could get to 50 to the dollar, resulting in even more flows. At the domestic level, though, I don’t see the markets jumping too much higher, as the Street is awaiting news from the winter session of Parliament and Budget thereafter (populist or reformist). If populist, the problems of higher interest rates and inflation won’t go away.

Fundamentally, markets are reasonably valued. The focus would be more on earnings growth. These grow 10-15 per cent, the markets, too, could move up by a similar proportion. Back in 2003-04, there was an initial pick-up, after which it started to track earnings growth. Then, you had the big earnings growth coming. That is when you get the multiplier effect of investment by both the government and India Inc. That to me, is more of a 2015 story.

So, would you jump from defensive to cyclical/interest rate sensitives? I think it is early to make that big bold move, as you still have consumption growth. So, I don’t want to run away from consumer, pharma or information technology stocks at the moment. But there is a case for selectively looking at some of the cyclical stocks.

Globally, investors are continuing to buy stocks with high yields (three to four per cent) compared to very low returns from bonds.

Historically (last eight-year average), markets have been trading at 17 times one-year forward. So, will we get there from the current 14 times? Yes, but not just yet. The two times Indian markets were looking down the barrel (P/E below 10) was in 2003 (SAARS, among others) and 2008 (credit crisis). So, anything between 10 and 13 P/E is a good entry point. At around 14, there will be some consolidation and we would like to see what would happen. But if there is a 10 per cent earnings growth from here, they will be back to P/E of 12.5 and 13 and I am comfortable with that.

While lower commodity prices are good news and rate cuts will help, the key issue for India is infrastructure. If you don’t see the infrastructure landscape change and companies building, then we will end up with the same problem we had in 2007: a fast growing economy with inflation growing just as fast because you don’t have the manufacturing capacity to meet demand. Everyone ends up raising prices because there is no extra capacity. While lower interest rates will have an impact on debt payments, which means free cash flow, companies will start to build when the confidence about demand comes back.

The author is CEO – investment advisory, Ambit Capital