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Market Outlook

July 3, 2013

India presents a mixed bag of macro data. On the one hand we have the GDP growth for the FY13 coming in at a decade low of 5%, lower manufacturing growth and PMI numbers. Trade deficit data stands at a stark $ 20 bn. On the other hand we have some bright spots in the form of lower headline inflation & overachievement of fiscal deficit for last year. It is a double whammy as we find that domestic consumption is not strong enough to shoulder the growth story as well as capital formation rate has also been unsupportive of any productivity improvement. But strong policy measures being taken are expected to yield results and improved external demand should boost exports going ahead. World bank has gone bullish and increased its growth forecast for India to 6.7% for FY14.

Global situation remains moderately positive on recovery seen in US. But US recovery which was supposed to spell good news for the global growth has turned global equity markets very volatile on tapering of QE program later this year. Eurozone clocked negative growth for the sixth consecutive quarter. China still battles slowdown as seen from lower PMI numbers. Fears of drying global liquidity have temporarily shaken the global markets and resulted in large-scale redemption from emerging markets like India. But robust policy measures by the government should support domestic growth and in turn allow the FII inflow trend to continue.

Valuations have currently dipped to enter the attractive zone, below the long term average. Further correction will only enhance the value and create a compelling story for long term buy into Indian equity.  GILT Equity Yield Ratio (GEYR) indicates Equity asset class continues to be relatively attractive. Forward PE of Sensex remains in the 13.6x zone, below 10-year average of 14.85x.Crude prices have risen from June onwards even as Gold continues to stay low. Threat to Current Account Deficit comes from a rise in global crude prices. Although we continue with gold recommendation for our portfolios for diversification purpose, we have reduced some exposure to the same.

Over all outlook in Indian context  is a good example of Growth At Reasonable Price (GARP) for international investors as we see the growth indicators showing signs of bottoming out. Recovery in developed markets is expected to support external demand for Indian exports which in turn should improve current account deficit. At present we have Indian markets at attractive valuations, domestic growth bottoming out and hence scope for improvement going ahead. This along with conducive policy measures should support growth recovery. Headline inflation is within RBI’s comfort zone. Despite headline inflation settling down in 2013-14, the inherent risk of easing supply constraints persists which in turn is a function of investment growth. Additionally, risk of subsidy burden increasing also stays in light of Minimum support prices being offered to agricultural products.

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