US and Europe would continue to suffer from the slowdown in their economies, which would negatively impact India’s IT and metal sectors
The domestic equity market in 2013 is likely to repeat the rise in 2012 and move up about 20 per cent. While reversal of the interest rate cycle would be a key trigger for the market during the first half of 2013, the uncertainty regarding the outcome of general elections in early 2014 would be a concern in the fourth quarter. This would limit the upside to about 20 per cent. Foreign institutional investors (FIIs) have bought $24 billion through 2012, on which they have an average gain of about 25 per cent as of on Sunday.
The further upside expected in the first half of 2013 would tempt them to book profits in the last quarter, as most of them would wait for the political outcome in 2014 before taking any major call on Indian equities.
We believe, both the US and Europe would continue to suffer from the slowdown in their economies. This would negatively impact India’s information technology (IT) and metal sectors. Hence, we continue to suggest avoiding stocks of IT majors and metal producers for at least the first two quarters of 2013. However, we advise accumulating mid-cap IT stocks which are debt-free, cash-rich and available at about half the valuation multiple of major IT stocks. Similarly, we suggest accumulating resource stocks like zinc and iron ore producers.
Year 2013 would see domestic demand factors and a falling interest rate contributing to growth in both the industrial economy and corporate earnings. Hence, we favour sectors like fast-moving consumer goods (FMCG), pharmaceuticals, capital goods and banking. However, while valuations of many pharma companies are still appealing, most FMCG stocks are quoting at highly stretched valuations. Hence, investors should restrict exposure to one or two quality stocks, like ITC.
In the last seven years, the Bankex has outperformed the Sensex in six years (except in 2008), thanks to a four-fold jump in credit base to Rs 47-lakh crore during this period. A similar performance would continue in 2013. Within the banking sector, the efficient, old private sector banks are likely to post outstanding performance in 2013 on further consolidation with the passage of the banking Bill.
We would continue to avoid highly leveraged real estate companies (except DLF, on which we are highly positive, as we expect it to reduce debts substantially in 2013), power and telecom stocks.
We are neutral on the automobile sector as competition in both two-wheelers and car segments has intensified. However, we are pessimistic about oil & gas, as we firmly believe cheap crude is gone and the problem of subsidy burden would continue for the PSU companies in this sector, as the government has neither the required resources to bear the burden or the will to transfer this to the public. However, within these two sectors, we suggest continued accumulation of Tata Motors (as its valuation is roughly half of other players), besides Reliance Industries Ltd (RIL) and ONGC as good long-term plays, on substantial revision of gas prices expected in 2014. RIL would also benefit from unlocking potential from its retail foray in the next two years. The major risk factor would be a failure of the monsoon in 2013 – India at this juncture cannot afford to experience a monsoon failure second time in a row!