Indian markets face the year ahead with many triggers for volatility. On the positive side, India is seen as probably the best candidate in the emerging markets’ pack. Its market P/E multiple continues to be higher than the MSCI emerging market benchmark and bond yields are lower than its peers.
Cash generation of the top 200 companies is pretty sound and the Indian retail debt is not at worrisome levels. Capex requirements are, by and large, comfortable. Stressed asset resolution is at last getting off the ground and some good assets are seen to be getting into stronger and more productive hands.
Against that, yields in developed markets (particularly the USA) are hardening, which signal higher interest rates worldwide and pressure on currencies which perpetually face trade and current account deficits, like the Indian rupee. Then there is no clarity on which ways the trade wars acrimony will settle and what would be the implications. It is likewise unclear as to who will emerge with how much damage from the panic that ensued from the scare in the domestic financial system.
Real estate, a key driver for so many sectors, is still in the doldrums. Lastly, there are elections looming, technically in the second half of the year, but which can be brought forward on the prerogative of the ruling government. Elections traditionally spook markets because policy visibility is hampered by short-term considerations and the pace of work can falter.
In the backdrop of trade wars, one safe policy (provided one can get the money) is to buy assets in different continents. That is precisely what Aurobindo Pharma is doing. The downside is that acquisitions generally take time to register positive cash flow, post debt servicing obligations.
Still, the company is good from a core cash-generating business perspective. Similarly, with consumer-level inflation in control, retail looks set to continue its good run, particularly Jubilant Foodworks and Aditya Birla Fashion and Retail. Other proxy consumer plays would be service providers to telecom companies, like Tejas Networks and Sterlite Technologies.
