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The Month Gone By

Friday 3 August 2012

By Dipen Shah

For both, Domestic and Global economies, markets have been moving in a narrow band on alternate bouts of optimism and despair. Domestically, there have been spurts of optimism, especially on the reforms front - once when the Prime Minister took over the Finance Ministry and now, with Chidambaram holding that portfolio. On the global front also, optimism soared on positive comments, which have not been backed by follow-up action, especially from the European Central Bank.

In India, WPI inflation continues to remain high due to high fuel and food inflation. Monsoon has been below-par, raising concerns on food price inflation. Industrial production in June came at a modest 2.4%. Thus, we are facing challenges on both, growth and inflation. Current valuations, at about 13.5x FY13 earnings estimates, provide only moderate upside to the median range of 15x one-year forward earnings.

With no major global events expected in the near term, we believe that Government reforms are the only positive trigger markets can look forward to. The gridlock continues likely due to lack of political consensus and it remains to be seen how much political will can the leadership muster to push through some of the initiatives. I remain optimistic, though relatively less than before, on the reforms front.

In the current scenario, a bottoms-up approach would be the best approach. Investors should accumulate stocks of companies having ethical managements and strong balance sheets across sectors. We can take a more constructive long term view of the markets and investment-led sectors if there is some initiation on the reforms front.

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