The long road to recovery

In my April columns I argued the following six months should see the start of a gradual recovery but until the data on both GDP and corporate profitability pointed more unambiguously to that recovery, we were likely to witness periodic bouts of market weakness. While the second point stands, alas, the first doesn't. The Reserve Bank of India has contributed to a deterioration in already falling business confidence through its liquidity measures. In addition to raising the cost of credit again, it created uncertainty in financial markets and the real economy, undermining confidence and discouraging investment. The capex cycle turn is probably still 18 months away, with private sector investment still moderating due to overleveraged balance sheets and the government in no position to pick up the slack. Pressure on the fiscal deficit is building again and the government can't sanction any meaningful investment surge. Indeed, we might see procyclical fiscal policies accentuating the economic slowdown.

Indeed, a good monsoon and a slowly improving global growth environment are the two positives one can point to over the rest of the year. The range of GDP growth forecasts is 5.3 per cent to 6.5 per cent but everything now points to a very marginal recovery this year. My sense is, we're looking at a sub-5.5 per cent number and no meaningful pick-up in the investment cycle and GDP growth until well past the general election. What should equity investors do against this backdrop, with uncertainty on the impact of tapering, lower capital flows, and weak confidence, currency and growth? Our mantra is to focus on quality and be careful about sectors. Sector wise shy away from PSU banks, industrials (except for L&T and Voltas), utilities, real estate and materials. Focus on defensive private banks (HDFC Bank, IndusInd), safe NBFCs (M&M Financial); beneficiaries of rupee weakness - IT (Wipro, Tech Mahindra, Persistent) and pharma (Lupin); and sensibly priced stocks exposed to structural domestic Indian themes that will run and run - rural credit (M&M Financial), Consumption (but only at a sensible price, like Titan), and Agri (Coromandel, Rallis, Bayer).

And last but not the least, one for the brave - buy India's cheapest stock: Power Finance Corp, trading at 2.5 times FY15 P/E, 0.5 time Price/Book Value, with 20 per cent plus ROE and earnings growth visibility.

The author is chief executive officer, Espirito Santo Securities