Market Strategy

¾  Indian markets started December on a positive note, in anticipation of coordinated action by central banks (for a possible solution to the of euro-zone crisis) in EU summit and key policy announcements from Parliament's winter session on the domestic front. However, the rally was snapped by policy logjam and renewed fears coming from the euro zone nations. Sharper-than-expected contraction in IIP and currency depreciation also impacted markets adversely. On the other hand, RBI's signal of rate hike pause and decline in food inflation came as positives for the market. US and European markets remained volatile due to fears of rating downgrades and lack of comprehensive solution to solve debt crisis. However, ECB's offering of 489bn euros in 3-year auction provided some respite from the rising yields of Italian and Spanish bonds.

¾  In the backdrop of a sharp contraction in IIP, RBI kept key policy rates unchanged in its mid-quarter policy review. It also signaled the end of long series of interest rate increases and mentioned that from now onwards, monetary policy actions are likely to reverse the cycle. Food inflation has also started coming down due to decline in prices of essential items and on account of high base effect. However, in terms of key policy reforms, there was disappointment as Government had to put on hold raising FDI limit in multi-brand retail as well as the Lokpal Bill. It also had to withdraw two important bills - the Companies Bill and Pension fund Regulatory and Development Authority bill - due to lack of political consensus on the same. It did introduce the National Food Security Bill, which has raised concerns on the fiscal impact of the same. 

¾  Markets have been reacting to macro-economic concerns such as growth slowdown, high interest rates and policy inertia on the domestic front as well as continued challenges in euro-zone region. On the positive side, inflation has started tapering down and interest rate cycle is also expected to reverse from Q1FY13. Valuations are also near the lower end of the long-term valuations band for the benchmark indices.

¾  However, we believe that, near term market performance will be influenced more by policy initiatives, currency movement, Q3FY12 results as well as developments in Europe and US. These headwinds may keep markets under pressure in the near term. Resolution of these issues is necessary for markets to stabilize and move up. We recommend a bottoms-up approach with a medium to long term view. One should accumulate stocks of companies having ethical managements and strong balance sheets, which are available at reasonable valuations, across sectors like IT, Banking, Media, Logistics, Capital Goods and Infrastructure sectors.