2. Equity View:
The election results surprised the markets last Friday, with the extent of majority with which the NDA
won. It was witnessed by a big move in Nifty on the same day which cooled off during the second half.
Overall, a lot has changed and we are hopeful of a new bull run when the economy will slowly be on the
mend. We expect a lot of reform measures to be announced over the course of next few months and this
should lead to some revival in the broader economy. The biggest and the most crucial thing is resumption
of the investment cycle.
There is a fair bit of ground for optimism on the equity side however there are caveats to growth linked
to the actions taken by the new government. There are things that the government needs to do before
we can call it a reforms oriented government like, some reforms on the ground which would indicate that
infrastructure is going to be revived. However, some part of this growth story is not entirely in the hands
of the government – most importantly the monetary policy and the interest rates. If the interest rates
remain high, growth would come from limited quarter of revival of stalled projects while if the same falls,
there would be additional Phillip to growth from investments picking up as well. Last week the WPI
number was released which came at 5.2, slightly lower than expectation however, which could cool off
the immediate concerns about rate hike.
If the government actually acts responsibly and maintains its fiscal discipline by cutting down subsidies
and wasteful expenditure, the room for monetary policy is much larger. So if the RBI believes that the
government will rein in the fiscal deficit through the year, it might be little more enthusiastic about
cutting rates. The monsoon also as predicted is not good thus in the short term, the view is cautious on
fundamentals not necessarily capital markets. The improvement in fundamentals of economy might be
moderate but to its response, the equity markets might witness a sharp uptake as visible in our target
expectations. Our 3-year outlook remains bullish.
As we had mentioned earlier with respect to the pre-election rally and its quantum, the markets rallied
~17.6% in the hopes and optimism of better governance. The growth this year is expected to be around
5.5-6% which will lead to nominal GDP growth of 13-14%. We also foresee the earnings growth of 14-15%
for whole of the year which will be a significant revival as compared to last few years. Based on the
overall scenario we have arrived at the new Sensex target of 38,500 for the next 3 years. As the economy
revives we expect earnings growth to be 15% CAGR for the next 2-3 years. We would expect the Sensex
returns to be of similar order as earnings growth. Another important point is that Midcaps have been
beaten down so much that Midcap index is still not back to its own high of 2008 thus there is a significant
upside in this space. Looking at the valuations and its outperformance over Nifty, it will be prudent to
expect 20-25% returns in Midcaps. Gamma as our strategy has consistently outperformed the Midcap
index by 10% in the last 3 years. Hence our returns expectation from the midcap space would be
extremely high.
In terms of sectors, we continue to like the top banking ideas in the private sector and select PSUs.
NBFCs, Housing finance companies and consumer finance companies are also expected to do well. We
continue to like select infrastructure ideas like some of the top companies in construction and
infrastructure space. We do not expect any revival on the ground in terms of earnings for most of these
infrastructure companies but as the economic environment eases, more approvals, clearances and
3. projects take off, we would believe that this space would benefit. It is just that infrastructure space takes
time to revive, and hence there might be a lag of 2-3 quarters in terms of actual improvement in result. IT
and pharma have taken a bit of beating in short term but considering the fact that their earnings growth
trajectory remains extremely robust, we would continue to look at the sectors favorably and there is no
reason to completely sell these off from the portfolio.
News:
DOMESTIC MACRO:
Inflation in India measured by the Wholesale Price Index (WPI) eases to 5.2% in April following a rise to
5.70% in March.
Industry body CII expects that a stable government could help the economy recover to 6.5% GDP growth
rate in 2014 -15 as against an estimated 4.9% in 2013-14.
Ratings agency Standard & Poor's expects the new Indian government’s reform initiatives in economic and
fiscal policies in the next two to three months may have significant implications on the sovereign credit
rating on India.
RBI data shows India’s foreign exchange reserves rose by $1.97 bn for the week ending May 9 to $313.83
bn.
Central Board of Excise and Customs raises the base import price of gold by $2 to $424 per 10 gm.
GLOBAL MACRO
EURO
Euro zone GDP increased at an annualized pace of 0.9% in Q1 2014 after expanding at a rate of 0.5%
in the previous quarter.
Bank of England in its Inflation Report for May says that the UK economy continues to strengthen,
but more slack needs to be absorbed before a rate increase is implemented.
UK ILO jobless rate declined to 6.8% during January to March, the lowest since February 2009, from
7.2% in October to December
United States
US consumer price growth accelerated annually to 2.0% in April from 1.5% in March, representing the
biggest increase since last July.
US Initial claims for unemployment benefits fell by 24,000 to a seasonally adjusted 297,000 in the
week ended May 10.
China
China's April retail sales were up 11.9% year-on-year, down from a 12.2% rise in March.
5. Varun Goel Jharna Agarwal
Nupur Gupta Ridhdhi Chheda
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