While the rally so far was largely on “recovery hope”, we think markets are likely to focus on execution of reforms and policy newsflow in the coming months. While we remain strategically positive on India, we believe the next leg of the rally from hereon will be less
sharp, more fundamentally driven and contingent upon the progress and implementation of reforms.
Over the past few months, the overall macro-economic data has come in better than market expectations, activity has picked up across a variety of indicators (auto sales, IIP, PMI, cement production, non-oil imports) and new capex activity has shown signs of stabilization.
We see limited room for further valuation expansion and we believe the market is likely to focus on the fundamentals of individual stocks, with earnings likely to be the key driver of market returns.
The demand/supply balance may turn less favorable in the coming months given the government’s aggressive divestment plans and
ongoing corporate equity raisings.
Overweight: Banks, Industrials and Info Tech
Marketweight: Autos, Materials, Utilities and Energy
Underweight: Defensives like Telcos, Healthcare and Consumer Staple
