MARKET REVIEW:
We had seen tough equity markets last year with index falling 23%. Indian stocks were one of the worst performers across the world during 2011. Overall performance in commodities segment was good and kept going throughout the year. The surprising move was in currency segment which saw rupee depreciating very steeply in a short span of 2 months. Debt market too, saw continuous increase in interest rate with 10 year Government Bond yield rising from sub 6% levels to touch as high as 9%.
A spat of problems kept control over financial markets ranging from international events like slowing western world and euro-zone crisis and domestic events like corruption issues, stubbornly high inflation and policy paralysis with the government. Normally, Indian markets command a premium as compared to global markets due to its high GDP growth, favorable demographics, and superior quality of population with built-in entrepreneur-ship of varied degrees. But the fall of 2011 has significantly reduced the premium and our markets now trade at a P/E of 12 (1 year forward earnings) as compared to long term average of 17. While the valuations are compelling and good for long term investors, it is of great importance to select the right sector and right company which is characterized by good management, transparent corporate governance and positive business climate.
Talking about sectors, interest rate sensitive sector such as banking, infrastructure, real estate, auto and others saw correction throughout the year as RBI aggressively increased their policy rates (repo and reverse repo rates) to tame inflation. Several blue-chip stocks had touched 52 week low as raw material cost kept increasing and rising interest rates began to hit bottom-line. Defensive sectors such as Pharma and Fast Moving Consumer Goods (FMCG) companies were out-performers.
MARKET OUTLOOK:
This year would mark consolidation in equities. Government reforms will play a vital role in furthering business revival. Some momentum is seen now with FDI in single brand retail and aviation. But lot needs to be done in this space. Introduction of Goods and Services Tax (GST), Direct Tax Code (DTC), New Companies Bill are some prominent ones which are being keenly viewed by Investor Class. The 12th Five Year Plan (2012-17) is again important which shall decide the fate of Infrastructure sector. On International front, revival of US economy and positive solution to Euro massacre will guide the risk appetite of Investors.
From a fundamental perspective, several stocks which are trading below their book value / fair value will attract buying. The investment theme since 2009 has been Consumption and this consumption-led rally would remain in momentum going ahead. The basic premise is that India is younger; the average age of population is 26. If you would have noticed the lifestyle of people is changing fast: people now prefer visiting Malls for shopping, multiplexes for watching movies, take help of professionals for planning trips; brand awareness is creating strong ground in people's mind. Again this year we would see chain of restaurants opening around in nooks and corners of India starring with Starbucks (which has formed JV with Tata Coffee) and Dunkin Donuts (JV with Jubilant Foodworks). Valuations of these companies are stretched as of now and any corrections would be good level to mark entry.
The high interest rate scenario prevalent now is set to reverse sometime in near future (probably from fiscal 2012-13). Moderating inflation will make the case stronger for reversal. This scenario would be ideal for investment in long dated government securities and corporate bonds. Retail investors can choose Gilt funds with longer duration.
We recommend sticking to your long term investment plan and continuing investing in equities and debt instrument in phased manner as both are rightly placed for long term. Due to higher interest rates, we are more biased towards investment in long-term debt instruments like NCD, Bonds, etc as they pose good chance for capital appreciation apart from benefiting by higher interest rate.
Following stocks are suggested for SIP:
1. Bajaj Finserv,
2. Blue Dart,
3. Coal India,
4. ING Vysya Bank,
5. Jubilant Foodworks,
6. Lupin,
7. Mahindra & Mahindra,
8. Tata Steel.
For any queries or assistance on financial planning, do write us on samarthcapitalservices@gmail.com.
