Time for a call on equities

Improving fundamentals, reasonable valuations are key positives.

A lot of damage has already been done in the last few days due to global concerns over the euro zone, tightening liquidity (hence, slowing growth) in China, as well as the stance taken by Korea on nuclear proliferation. Indian equity markets have dipped over seven per cent.

Though these concerns have not eased completely, market pundits believe the time has come to invest in Indian equities.

An uneven road...
Due to the global risk aversion, foreign institutional investors (FIIs) – who were net buyers of Indian equities to the tune of Rs 8,271 crore in the first four months of 2010 – sold stocks worth Rs 12,367 crore in the month of May alone. "It is mostly 'hot money'. Foreign investors are using every upside to sell their stocks," says Ambareesh Baliga, vice-president, Karvy Stock Broking.

Analysts fear the near term, influenced by global issues, will continue to be volatile as the FII selling might continue (in India as well as globally) for some more time, at least till the global concerns ease. But, at the same time, these same concerns are also making the markets more attractive in terms of valuations.

The Sensex is currently trading at about 15 times one-year forward earnings, very close to its 10-year average of 14.5 times, suggesting the downside will be limited. What also plays in India’s favour is that "India was not singled out and most of the global markets saw outflows during the second week of May. However, India is still viewed as a defensive play" — according to Cameron Brandt, senior analyst at EPFR Global, which tracks global fund flows.

... to improving climate
Besides reasonable valuations, India’s strong economic fundamentals should also act in favour of its markets. India's overall prospects remain promising, backed by an estimated GDP growth of over eight per cent and a rebound in the corporate earnings in 2010-11. Additionally, the fiscal deficit is also expected to be lower than projected, thanks to the higher-than-expected licence fee collections from the auction of telecom spectrum.

Inflation, too, is expected to ease out soon. And, now, the relatively lower commodity prices should help lower cost pressures for India Inc. Further, experts believe a weak global environment will limit the Reserve Bank of India from raising interest rates, as it could hurt India’s economic revival.

Strong industrial production numbers and a recovery in the job market, along with an expected hike in salaries and additional savings due to lower tax rates, are other indications that have turned experts bullish. A normal monsoon this year should also translate into good agriculture growth, along with higher rural demand.

Outlook & strategy
The research arm of Deutsche Bank has put up a target of 22,000 for the Sensex by end-2010, which is based on 20 times 2010-11 estimated earnings. Citi Investment Research & Analysis very recently upped its Sensex target to 18,100 and expects corporate earnings to grow at 15 per cent annually over the next two years.

Likewise, others have put targets ranging from 19,000 to 21,000. And, while ruling out any major corrections from current levels in the near term, they expect markets to rise in the medium term once global issues start easing. "We don’t think investors are waiting for a big correction. There is still a lot of liquidity out there, chasing a finite number of good quality assets," says Cameron.

Since it is difficult to time the markets, experts say investors should start buying gradually. Also, as a preferred strategy, they suggest sticking to companies that are a play on increasing domestic consumption as well as set for investments, like capital goods, infrastructure, banking and automobile sectors.