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As Sentiment Gets A Boost

Monday, December 17, 2012
By Clifton Desilva

Clifton Desilva is an investment expert and a Director at Altina Securities.

Stock Markets
A week after winning in parliament the vote on 51% foreign direct investment (FDI) in multi brand retail, the UPA government   gave a big push to the reform agenda. The union cabinet cleared the long awaited proposal to set up the cabinet committee on investment (CCI) and the amendment to the Land acquisition bill.

The cabinet also approved re-auction of the 1800 MHz band spectrum in three telecom circles at a base price 30% lower than that fixed for the recently concluded auction.

Besides the cabinet committee on economic affairs (CCEA) approved the new investment policy for urea, which could help garner investments estimated at around Rs 35,000 crore. The new policy provides incentives for the setting up of new fertilizer plants and expansion of existing ones, aimed at cutting import dependence.

The proposed CCI is expected to speed up clearances for infrastructure projects above Rs 1000 crore. The body to be chaired by Prime Minister   Manmohan Singh is being set up at a time when the planning commission has envisaged investments to the tune of Rs 56, 14, 730 crore in the infrastructure sector over the 12th five year plan (2012-13 to 2016-17)

The infrastructure sector is a key sector which could propel the economy to higher growth  trajectory and due to policy inaction in the recent past there were over 100 projects with investments of Rs 1000 crore or more that were delayed..

If a thrust is provided to the infrastructure sector the sentiment for the stock market in 2013 could turn positive unlike the year 2012, which commenced   with uncertain global macros, continued with high inflation and high interest rate scenario besides uncertain political environment. Through the year, growth expectations were cut and inflation expectations revised upwards leading to the Reserve Bank of India (RBI) to refrain from lowering rates. Despite these constraints India has been one of the best performing markets in 2012. In fact most of the gains have been witnessed in recent months in view of the government going into the reform overdrive.

Based on the various initiatives initiated by the government there are expectations that there would be recovery in growth both at the macro and micro levels which gross domestic product at 5.3% in Q2 having reached a bottom and going forward  there  would be improvements.

The slew of announcements made in September, followed by approval to foreign direct investment (FDI) in retailing and the proposed National Investment Board have partially boosted investor confidence. The government now seems to be committed to reviving the investment cycle. Fiscal consolidation might be another focus area for the government. Measures like the Direct Taxes Code and Goods and Services Tax could help improve the revenue stream in the coming years.

After a 50 bps cut in the interest rate in April, RBI has been hawkish through the year. With growth having .slowed down   there are indications that the RBI may reverse its tight monetary policy

While inflation remains above RBI’s comfort zone, it has slowed. Core inflation at 5-5.5 per cent and food inflation also coming off could be comforting for RBI. In fact, RBI has hinted at possible rate cuts in Q1CY13.

Also the global macro-economic backdrop has eased considerably with the US economy witnessing a marginal growth, the Chinese economy showing signs of stabilization and some improvement being also witnessed in the euro zone. Liquidity has also played a major role with developed economies announcing quantitative measures to support economic recovery. India too, has benefited from this liquidity, with the indices moving up on the back of foreign institutional investor inflows of $20 billion. With all the positive developments and more on the anvil, the stock markets should see an improvement in sentiment which would make equities an attractive asset class and could provide superior returns over the next 12 months time.

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