Globally, Greece’s agreement with its lenders has reduced the chances of a disruption in major world equity and debt markets. Some points of concern that still exist are, volatile US economic growth, the slow European economic recovery and a decelerating Chinese economy. In the last few months, the prices of most commodities have fallen significantly, largely due to lower demand from a decelerating China. The U.S. Federal Bank’s stance on interest rates will be a key factor to watch in the near term. There are, however, views that the U.S rate-hike could be delayed and eventually should not be large enough to impact asset markets.
In this economic backdrop, we believe that India is poised for a steady cyclical recovery aided by the lower inflation expectations, relatively lower interest rates and a pick-up in government spending. The sharp drop in global commodity prices will have a structural impact on the trade, current account and fiscal deficits, and give the government leeway to carry out further structural reforms like fuel price de-regulation, subsidy reduction etc. We expect monsoon to improve and it will support interest rate cuts on account of falling inflation. Interest rate cuts should help to pick up growth, improving the fiscal deficit situation as a result. Growth should also be supported by the passage of important legislations like GST and a pickup in infrastructure investments. However, given that India was amongst the best -performing markets over almost two years and that valuations are at average levels, markets may not move up sharply in the next few months. However, there are many stock and segment-specific exciting ideas.
Overall, we are bullish on industrials, consumers and financials and underweight on materials, energy, telecom and pharmaceuticals. We have identified sectors which are likely to be growth leaders; for example road-building, railway, auto, auto-part suppliers, defence private banks, multiplexes etc. and are well-positioned in these segments.
The bond market looks very attractive at this point. With the crash in global commodities, the fiscal deficit and balance-of-payment is likely to improve significantly. The RBI has cut rates by 75 basis points since the beginning of the calendar year but long-bond yields have not gone down due to global and local short-term factors and the hawkish tone in the earlier RBI policy statements. However, it is only a matter of time before rates soften and bonds rally.
There has been a paradigm shift in the pattern of investments by retail investors. Equity investments have substituted investments in gold and real estate in their portfolio. This calendar year first two quarters witnessed more than INR 4000 Crore in investments by domestic investors. This has important repercussions on the Indian equity markets as dependence on foreign flows is reducing which in time will make Indian markets more resilient.
CIO, Max Life Insurance.