Sunday, May 24, 2009


Opportunity lying outside the index

Who says Black swan events always have a negative impact? They can also work well on the positive side, as is the case of the outcome of the Indian general elections. Who could have predicted the clean sweep by the UPA in the elections? However, the UPA is indeed about to form a government at the Centre with the Indian National Congress being the major political party in the coalition with 206 seats.

Much to the consensus relief, the new government formed will not need the support of the Left and the alliances of local regional parties, which would have otherwise impacted the decision making process of the government had they been party to the coalition. This will indeed send huge positive signals to the economy and the capital markets.

So, the big question that remains is where does the market head from here?

In our recent strategy report, we had mentioned that if the election results are favourable then the markets may reach 14500 levels on the upside in the short run. It did that within two trading sessions after May 16 2009. However, on the first day when markets opened, within a few seconds, for the first time ever, the market hit the 15% upper circuit followed by an additional 5% rise. This gave no chance to the investors to buy into the markets. As large caps have rallied substantially, mid caps soon followed suit. Since the substantial appreciation in large caps has created a huge valuation divergence between large caps and mid caps, the ongoing run in the mid caps is simply a case of catching up.

We believe that within the midcap universe only quality midcaps will witness sustainable buying interest. Within this segment, PSU banks, private regional banks, power companies and high leveraged plays will be preferred. In addition, we are of the view that one should view any deep correction in the markets as an opportunity to accumulate quality stocks at reasonable valuations.

However, one thing is for sure. This black swan result has indeed increased the visibility of the India growth story in front of the international investor community. Now, on the back of expectations of better policy reforms, increased focus on fiscal deficit and high probability of PSU divestments and prudent & speedy executions related to the important bills like that of FDI in insurance will result in increased FII participation in India.

Key expectations from the new government:
  • Improvement in fiscal management/public finances via disinvestments
  • Increased focus on infrastructure spending especially power and road/highways.
  • Thrust on agriculture and rural development
  • Financial sector reforms like increasing FDI in retail and insurance sector
  • Increased focus on education and healthcare
  • Providing ample liquidity to corporates and individuals at affordable rates

We believe the above factors will help in bringing fresh capital into the country in terms of FDI, FII flows and ECB flow

Key Beneficiaries
  • Insurance plays like SBI, Kotak Mahindra Bank and Reliance Capital
  • Infrastructure plays like Bhel. L&T, NTPC etc.
  • PSU banking stocks with trigger of government stake dilution for example: OBC, Dena Bank, etc.
  • PSU space will be in limelight on expectations of divestments and new IPOs

To see full report: MARKET STRATEGY