Mining, pension, banking reform is prerequisite for market to move up

How will the equity markets fare in 2012? Will stocks gain or will they have a torrid time like they did in 2011? What will be the key influences of the year? Will domestic or global factors dominate?

Firstpost interviewed Dipen Shah, head of fundamental research at Kotak Securities, for his views on what stock investors can look forward to next year. While Shah thought that current valuations provided support, domestic reforms were crucial for markets to move higher next year. Even foreign fund flows would be determined by the pace of reforms, he said.

Here are the edited excerpts:

What is the outlook for the Indian markets in 2012?

In the past few weeks and months, markets have been weak. The fall has been all across the globe and that has come about on the back of the higher concerns over Europe and the US.

While the global factors have impacted the global markets, India has underperformed most of them. The reasons are, obviously, local. We have had high inflation and interest rates. Also, the slower decision making on the policy side has had an impact, which is severe. Corporate India has, thus, reported weaker numbers.

From the market’s perspective, the current valuations (12 times consensus estimated earnings for the Sensex for the year ending March 2013) are at the lower end of the long-term trading band (excluding 2008). This should provide support to the markets, barring catastrophic events.

However, corporate growth and profitability in financial year 2012-2013 (and also the Sensex earnings) depend, to a large extent, on the investment decisions taken now and on how consumption will pan out, which, in turn, will be influenced by policy actions.

We opine that, domestic reforms are the pre-requisite for the markets to sustain and move up from the current levels. There is still uncertainty on how much and how fast it will be done. However, we have started seeing signs of aggression from the government.

We expect to see more initiatives in areas like land acquisition, mining, pensions, banking reforms, etc., in due course of time. The continuing delay in general sales tax is something which also should be addressed fast.

So, assuming that interest rates and reforms play out favorably, the markets may find support at the current valuations, subject to volatility in the near term.

Which sectors will be the main investment themes next year?

We expect IT, banking and infrastructure sectors to do well over a 12-month perspective. We are cautious on metals.

What is your view on interest rates and inflation for 2012?

We expect inflation and interest rates to come off. The Reserve Bank of India has clearly indicated that the interest rates may trend lower in future quarters if inflationary pressures moderate. With food inflation coming off sharply, we expect WPI (wholesale price index) inflation to also moderate. Also, with growth moderating at a fast clip, we expect interest rates to moderate in 2012.

What is your view on foreign investments for next year?

The global situation is very uncertain with major developed economies facing debt concerns. We believe that growth rates will be very muted in developed countries assuming there are no defaults / bankruptcies. Thus, liquidity will likely try to find other avenues for investments, including emerging markets.

Within emerging markets, investments into India will largely depend on how fast policy initiatives are implemented. While there are concerns over reform in the short term, we opine that, over 2012, reform initiatives will be taken up and implemented, which should improve sentiment.