The markets have more or less been range-bound in recent times, seeing bouts of volatility due to external and domestic events and macro problems. Inflation remains the key issue that is marring the near-term horizon. As far as global issues like Greece and Libya are concerned, they could contribute to uncertainty leading to some near-term gyrations, but eventually they move in tandem with earnings. So long as investors stick with quality companies with good earnings visibility, at current attractive valuation levels, returns are likely to be reasonable.
Investors should stick to sectors that have good prospects for profit growth, especially those which will benefit from dissipating interest and inflation concerns. As far as inflation goes, in my view, the Reserve Bank of India has taken enough policy actions to contain demand-side inflation. In fact in sectors like real estate, auto and construction, which are a good barometer of domestic demand, high interest rates are already beginning to take a toll.
Hence, it looks like interest rates could start cooling off three to six months down the line, once supply-side inflation has run its course and starts coming down as well (most global commodities are already moderating). Also, by then the markets will start examining earnings visibility for FY2013 more closely as well.
Going ahead, the increase in Sensex profits is expected to be driven by sectors such as banking, metals, pharma and construction and I would advise investors to invest in these sectors since valuations are reasonable and earnings visibility is high.
It is not necessary to only stick to contrarian ideas to generate wealth, or focus only on value or only on growth stocks to beat the markets. Contrarian ideas are also important and at the same time one must recognise that there are some stocks that offer a combination of value and growth that is simply too compelling. For instance, on the one hand you have a large-cap sector like IT, where although growth is there but value is missing.
But at the same time, banking sector has been a perennial favorite with me, because I’m getting consistent high growth at reasonable valuations.
Moreover, if an investor invests regularly, then he will be able to average out any near-term gyrations in the markets due to noise on the macro-front such as the Greek crisis. Thus, on a compounded basis, over the long-term he can generate significant returns from equities.
The author is CMD, Angel Broking
