Markets should recover in the next 1-2 quarters

Despite recent corrections in the Indian equity market, I must say from a medium-to long-term perspective, Indian economy and markets are poised for excellent growth, provided reforms continue to roll. It is a good time to start looking at cheap stocks with good earnings potential. Recovery might be seen in the next one or two quarters itself.

One reason for the recent correction is that the speed of reforms is not matching unrealistic expectations for many. It is true that expectations hit the roof when you get a Modi-type of a victory. However, these have become more realistic.

Another factor that affected the sentiments is the disastrous earnings report of corporate India in FY15, worst in a decade. However, we believe earnings growth has most likely troughed in FY15. Lower commodity prices, lower interest rates and improving consumer sentiment should result in demand recovery. Earnings recovery is likely to be gradual and back-ended in FY16.

IIFL research forecasts 21.5 per cent PAT (profit after tax) growth in FY16 for our universe of companies with aggregate market cap of $1.2 trillion or 78 per cent of total market cap. We favour financials, consumer discretionary, industrials, information technology (IT) and cement sectors.

From a global investors' perspective, India still remains one of the most attractive destinations. Though, hardening of US interest rates will be keenly watched and could result in a global risk-off situation, fundamentally, India should find allocation from most global portfolio managers focusing on emerging economies.

If we look closer at home, most of us agree the state of the economy has improved in the past one year. The transparent auctioning of coal blocks has added $33 billion to the government kitty, while the figure for spectrum auctions was $18 billion. The inflation moderation policies, led by Reserve Bank of India (RBI) and backed by the government, have paid off. Not succumbing to vote bank politics, the government has hiked railway passenger fares, upped gas prices, deregulated diesel prices, while containing budgetary allocations to the rural jobs scheme.

Fiscal consolidation, expenditure reform and infrastructure development have been focal points of the Budget that have led to impressive pick up in road awards and power transmission and distribution focus. The government was spot-on with the foreign direct investment (FDI) hike in insurance and defence.

We have a list of goals in work-in-progress mode. The 'Make in India' vision, the goal of rationalising freight distances for natural resources, Land Acquisition Bill, Goods and Services Tax, among others. There are challenges and daunting ones at that, but in all fairness, most of the current hurdles are of a political nature.

Going by the enduring benefits of the many accomplishments cited above, we need to wait for another year to see potential, translate into performance. Moody's India Rating outlook upgrade is proof of India's growth trajectory. I believe the equity markets will benefit from the ongoing and the projected reforms.

The author is chairman, IIFL Group