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End of year dip offers opportunities for savvy investors

With large foreign funds, the biggest investors in Indian shares this year, showing signs of fatigue the outlook for Asia’s oldest bourse is jaded. Market pundits believe a drop in share values as the year winds down could be an opportunity for savvy investors to build a good portfolio, resolute in the hope that the beaten-down economy could fire up in the coming year.

Much of that would depend upon the national elections due by next May delivering a decisive verdict. Some big players such as Goldman Sachs and Credit Suisse believe a victory for the opposition Bharatiya Janata Party could trigger a strong bull run because its candidate for the prime minister, Narendra Modi, is widely backed by industry captains.

“This is the best time to restructure one’s portfolio since the market is not overvalued,” said Raamdeo Agrawal, joint managing director of brokerage Motilal Oswal Financial Services. “People are tired of weak execution of policies, and once that is addressed by a decisive government, stock market will witness return of domestic investors.”

India’s $2 trillion (Dh7.34 trillion) economy, Asia’s third largest after China and Japan, has slowed sharply over the past two years with the Congress party-led ruling coalition paralysed by a series of corruption scandals. As the government stalled on policy decisions, and failed to take the lead to remove bottlenecks that held up proposed large investments such as by ArcelorMittal, the world’s largest steel maker, and South Korea’s POSCO, business sentiment plunged.

Economic growth for the September quarter is due on Friday and the data is expected to reinforce the ills that have halved expansion from near double digits until about three years ago.

“With almost three quarters of FY14 behind us, inflationary pressures remain unabated, manufacturing sector fails to revive, fiscal deficit continues to rise and the domestic private sector consumption continues to weaken. As a result, overall GDP is expected to have grown at around 4.5 per cent during the [second quarter of the 2014 financial year] and is further likely to remain weak during the remaining fiscal year,” said Arun Singh, senior economist at Dun & Bradstreet India.

The only support for the economy has been from easing of current account deficit due to revival in export demand, while fast tracking of tardy infrastructure projects by the government would take time for the trickle-down effects to show, he said.

An overwhelming 83 per cent of some 75 chief executives surveyed by Boston Consulting Group and Confederation of Indian Industry identified slowdown in domestic demand as having had the biggest impact on the manufacturing in the past 12 months. Persistently high inflation, a rise in borrowing costs and fewer jobs have contributed to the drop in consumer spending.

Still, the study showed that 70 per cent of the chief executives expect manufacturing growth over the next five years to be greater than in the previous five. The share of manufacturing in overall GDP has dropped to a 10-year low of 15.1 per cent. There is little doubt that a decisive political leadership can turn the tide for faster growth.

“America’s share of manufacturing exports is at its highest in the last several decades. If USA with its higher cost can do it, why can’t India, with its inherent advantages of low cost labour, and engineering talent do even better,” quipped Hal Sirkin, senior partner at Boston Consulting Group’s Chicago office.

Investors looking for relative sure bets could take a look at two stocks that HSBC has rated as its “highest conviction overweights” — Tata Consultancy Services, India’s biggest software services exporter, and Sun Pharmaceutical Industries that has steady stream drugs for the US markets.

“We believe TCS continues to have the most resilient business model in the sector and has been able to growth and gain market share even in a weak spending environment, like 2012. As the demand environment improves, the company is likely to maintain its growth momentum with improvedcertainty,” the foreign bank said, with a target price of Rs2,540.

For Sun Pharma, with a price target of Rs725, its pipeline of 138 pending ANDAs covering a rich mix of items makes least vulnerable to the post patent cliff decline in the US. ANDA or Abbreviated New Drug Application is the process by which companies seek US generic drug approval for an existing licensed medication.

For now, however, the stock market would move in tandem with the mood swings of foreign funds, Motilal Oswal’s Agrawal said, adding that the “tapering” by the US would be the main determining factor in the near term.

The top-30 Sensex shed 0.7 per cent this week in volatile trading, as concerns blew hot and cold about when the US Federal Reserve would start cutting back its $85 billion-a-month bond buying programme, which has flooded global liquidity and catalysed the flow of cash into emerging markets such as India.

The writer is a journalist based in India