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Rediff.com  » Business » Equity outlook: We are likely headed for a long-term bull cycle

Equity outlook: We are likely headed for a long-term bull cycle

December 06, 2013 09:49 IST

Equity outlook: We are likely headed for a long-term bull cycle

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Sudhakar Ramasubramanian

We remain optimistic on the performance of the equity markets in India relative to the other asset classes. The Indian equity markets have been buoyant since September 2013 and have rallied by about 20 per cent to a new lifetime high.

However, one-year forward P/E multiple for the Sensex continues to be within its long-term mean of 14-15 times. Polarisation is clearly visible with some sectors and stocks that remain in favour commanding higher valuations while a whole lot of others have seen decline in prices or have not seen any interest.

Though the mid-caps and small-caps have seen some buoyancy over the last one month, one-year forward P/E multiple for BSE mid-cap and BSE small-cap indices suggest that the two indices are still trading at a discount of about 13 per cent and about 35 per cent to the Sensex, respectively.

While the macroeconomic parameters remain weak, we believe the worst is behind us. Markets remain largely liquidity-driven.

Market momentum is getting built up ahead of the state elections outcome.

We expect the sentiment to  continue to get better in the next few months on expectations of an improvement in economic activity, better policy decision-making and a betterment in the overall investment climate.

We do expect the markets to see new highs and deliver good returns to investors in the few months ahead of the general elections.

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Photographs: Reuters
Tags: BSE , India

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Equity outlook: We are likely headed for a long-term bull cycle

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After elections, stability in economic policy will lead to revival of the investment cycle, which will help in better visibility of higher growth in India. This will help the market rally to sustain.

However, volatility is expected to remain high in the next six-eight months, both in domestic and international factors, and investors will have to cope with volatility, led by various external factors like the US Federal Reserve tapering its bond-buying programme, US debt ceiling, local macroeconomic indicators, etc.

While the tapering would lead to an increase in market volatility, it would be less painful if India manages to tame inflation and exports pick up meaningfully. For the quarter ending September, 70 per cent of the Sensex companies beat the analyst estimates versus 57 per cent in the previous quarter indicating the earnings downgrade cycle is more or less coming to an end. There is clear under-ownership of Indian equities by domestic investors. We believe the step-up in domestic buying would also support.

Thus, we are of the view the equity market uptrend remains intact strategically and we are possibly heading for a long-term bull cycle. The market is likely to remain a stock pickers’ market in the foreseeable future.

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Photographs: Reuters

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Investors should focus on cyclical stocks and position themselves for other dominant themes, that is, rural and export-led businesses, reforms and earnings upgrade and related stories.

We recommend selective bets in banks and cyclicals such as capital goods, infrastructure, metal and automobile. Companies in this space are trading at distress valuations, in some cases at a 50 per cent discount to the replacement cost.

Valuations in defensives are very rich, with sectors like fast-moving consumer goods, pharmaceuticals and information technology trading at a significant premium. However, selective opportunities here are good to have in the investment portfolio.

Quality mid-cap businesses, which are leaders in respective segment, can also be looked at for investment.


The author is managing director, Aditya Birla Money


Photographs: Reuters

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