Strategy - bulls to hibernate:: Edelweiss

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n  Global economic recovery to gather pace in 2011….

We have grown more confident of the economic recovery in western economies in 2011. The Fed’s QE2 has reduced the downside risks, while extension of tax benefits has improved US’ growth prospects, auguring well for rest of the world. In Europe, we expect real economy to gain traction, but intra-regional divergences will persist. In the emerging markets (EMs), recovery seems complete with output gaps closed. 2011 will see growth consolidating, with the private sector replacing public as the driver of the economy. 

n  …but the horizon is still cloudy

Few risks continue to linger: (1) Possible worsening of European sovereign crisis, triggering global risk aversion; (2) ultra-loose monetary stance by major central banks (putting upward pressure on domestic inflation and EM currencies), leading to restrictions on capital and trade accounts by EMs; (3) Chinese policymakers are walking a tightrope in terms of simultaneously tackling rising inflation, imbalance in the economy, moderating economic growth and cooling off property market. Getting the policy mix just right will be a tall order.

n  India’s economic expansion brisk and balanced…

After bottoming out in March 2009, India’s GDP growth is regaining its pre-crisis trajectory. In FY12, we expect private consumption to lead the economic momentum, supported by buoyant rural and urban incomes. Also, investment activity is likely to pick up gradually through the year. However, government support to the economy may wane, going forward, while agri-growth will normalise after a sharp turn-around. Widening current account deficit will be an added drag on the GDP growth. We expect real GDP to grow ~8.3% in FY12 against the projected ~8.6% in FY11.

n  …yet concerns are more than ever

Indian macroeconomic scenario is marked by few risks/challenges: (1) Widening of the current account deficit and shifting nature of funding of the deficit towards non-FDI flows; (2) rising global commodity and crude oil prices, adversely affecting inflation, current account deficit and the Centre’s fiscal position; (3) rising cost pressures (raw material and interest rates), posing a risk of earnings downgrades as we progress into 2011; and (4) recent instances of lapses in corporate governance have negatively impacted India’s image as an investment destination.

n  Overweight on sectors with global interface, cautious on rate-sensitive cyclicals 

We favour a defensive bias within the portfolio. We recommend focusing on low capital intensive industries with secular growth rates and industries with global interfaces, while avoiding rate sensitive cyclicals and financials. In this context, we are moving energy, metals, utilities and healthcare from equal-weight to over-weight. We are downgrading BFSI from equal-weight to under-weight and are moving both industrials and real estate from over-weight to under-weight. We remain bullish on IT and maintain our over-weight stance on the sector. We continue to remain bearish on cement and telecom.