Flashback 2014
The year 2014 has been memorable for Indian equity market, with Nifty delivering returns to the tune of 31.4% (in dollar terms 27.2%), best in 5 yrs. In May 2014, strong mandate of change was handed to single party (BJP) with majority to form the Government after 30 years. The newly elected PM, with its strong leadership skills has instilled confidence of global investors in Indian growth story. Key sweeping policy changes that has been implemented are: FDI in real estate, insurance, defense, Make in India campaign, Clean India campaign, online environmental clearance, amendments to land acquisition bill, roadmap for coal block auctions, roadmap for smart cities, revival and modernisation of railways and at last but not least the efforts to boost productivity of public machinery and cut in red tape. Moreover, 45% YTD correction in crude oil price is "icing on the cake" for Indian economy, thereby containing retail inflation below 5% and providing comfort to the govt. on CAD front. Rate cut is imminent in 1HCY15.
On international front, US FED has curbed its bond buying program and is gearing up for rate hike in 2HCY15. Impact of rate hike in US will have minimal impact on Indian economy as we have an healthy forex reserve of $320 bn (up $24.5 bn YTD). Crack in crude oil prices has led to fiscal and currency imbalance for oil exporters like Russia and Middle East (ME) countries. Europe, Japan, Brazil and China continues to struggle with growth pangs. Hence, Indian economy is in a sweet spot and likely to be preferred investment destination among the emerging markets. During CY14, FIIs invested $16 bn in Indian equity market, whereas DIIs were net seller to the tune of ` 75 bn.
Way forward 2015
Indian equity markets are trading at reasonable valuations, FY16E and FY17E P/E multiple of 14.6x and 12.8x, respectively. Nifty's earnings growth is likely to be 19.7% and 14.2% in FY16E and FY17E respectively (Bloomberg consensus). We believe that the newly elected government is committed to push reforms during CY15 with focus on PSE, Railways, Power, Infra, Defense sector and also structural changes in taxation like GST implementation.
Economy growth in CY15 hinges on recovery in capex cycle and the pace of the cut in the interest rate. During CY15, street will keenly watch various macro parameters like Fiscal & Current account deficit target for FY16, bond yields, GFCF, GDP growth and INR/$ equation. On international front, investors will focus on recovery in China, Europe & US and geo-political situation in ME.
In short term, markets will start discounting the budget expectations. In medium to long term, equity markets will be driven by earnings growth of respective sectors and companies. We believe 2015 will be the year of cyclical with key theme being home improvement solutions, deleveraging, revival in manufacturing activity, FDI in various sectors and revival of rural economy. We recommend to invest in equities and have shortlisted 9 businesses, which are likely to deliver 20-25% return during next 6-12 months.
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