The Repo Rate Hike: Inflation Gave the Cover, the Rupee Gave the Reason

Strong growth to take markets higher

Anand Rathi / July 30, 2010,

The Indian equity markets continue to show strength and have touched intermediate highs, despite weak global cues, particularly from the euro zone. Year till date, our markets have given positive returns and need to be viewed against the global headwinds leading to risk aversion. Going forward, while the international economic scenario and data points coming out of Europe and the US will feature prominently on the minds of investors and drive foreign flows into India, we expect the strong domestic economic growth to continue and the recent out-performance exhibited by the Indian indices to sustain.

While inflation has been a cause for concern, it is expected to peak out at around current levels and ease off during the second half of the year. Corporate earnings for the first quarter have mostly been in line with optimistic expectations. Going ahead, Nifty earnings are slated to grow around 25 per cent for 2010-11 and 20 per cent for 2011-12. Though 2010-11 earnings growth is likely to witness disproportionate contributions from materials and oil & gas segments, it is likely to be broad-based for 2011-12 and should provide the desired impetus for the indices’ northward trajectory as investors start focusing on next fiscal’s numbers.

The government’s keen interest in taking reforms forward augurs well for the economy and inflows from FIIs. We have already seen reforms in the oil & gas and telecom sectors and there is hope for retail and insurance, too. We expect the investment cycle to perk up once again shortly on the back of a strong economy, creating increased credit growth for banks and simultaneously generating increased order flows for the infrastructure sector. While metals & mining may continue to be weak, given international constraints, realty and telecom may be good contrarian buys for long term investors. Those who want a defensive portfolio may go overweight on consumer, pharma, auto, IT and industrials, but long-term investors could gradually shift from defensive to growth sectors during intermittent corrections.

India stands to benefit as global liquidity chases high-growth destinations in the prevailing low-interest rate scenario and given the likelihood of the same continuing in developed economies. A lot of smart money is also waiting on the sidelines, looking to enter the market at an opportune time.

While the indices may not move sharply northwards in the short run, they may consolidate on their recent gains. Longer term investors may use corrections to invest in companies where visibility of earnings continues to be strong and sustainable.

Note: The author is chairman and founder of Anand Rathi Financial Services.