Strategy - From vicious to virtuous cycle :: Edel

Government back in action, RBI to reciprocate….

·         The government finally broke out of the policy logjam by initiating politically sensitive steps (e.g., FDI in retail and fuel price hike); sent out favourable signals to investors, businesses and RBI

…and western central banks’ actions have reduced tail risks in global system

·         At the same time, aggressive monetary actions by ECB (also Fed) have reduced risks in the global financial system. This improves capital flows (and hence BoP) scenario for India

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Positive for sentiments, but few more areas need immediate attention

·         For the recent policy actions to be meaningful, more clarity is required on coal-price pooling, faster clearances of infra-projects from MoEF and implementation of restructuring plans for SEBs

·         Government actions on these fronts will lead to gradual return of the virtuous economic cycle; FY14 economic outlook will improve substantially, and cash-rich PSUs could lead the investment cycle

·         However, risk arises from lack of follow-up on announcements and also the possibility of mid-term polls given the government’s minority status

Markets: Valuations below historical average

·         The earnings downgrades momentum is fading and if govt. keeps up the reform drive, we might see earnings upgrades in the near-future. On 12M rolling earnings for Nifty, our estimate is ~425 and assigning an historical average  multiple of 14.5x (given the upbeat sentiments), Nifty could reach ~6200 in next 12 months.

Sector themes: Adding beta

·         Market themes: (1) playing rate cycle by going O/W on industrials and banks from neutral and U/W, respectively;
(2) trimming positions in consumers from neutral to U/W and maintaining U/W in healthcare as sentiments recover; and (3) cutting weights in IT from O/W to neutral on appreciating INR

Strategy - From vicious to virtuous cycle

Regards,