Over the past 18 months our recommended strategy has been â€œgood & cleanâ€ investments and each our G&C portfolios have significantly outperformed the market (producing, overall, 20.7% outperformance vis a vis the BSE500 over the past 18 months).
Even in the wake of the reforms announced on September 13-14, we would recommend that investors stick to good & clean (rather than chasing high beta) albeit with greater weighting towards cyclicals (ex-banks) and lower weighting on FMCG & IT.
Our rationale for sticking to high quality investments are as follows:
>> TMC: The view from Kolkata is that TMC is likely to withdraw its ministers from the government in the coming days. With Parliament out-of-session until the last week of November, we donâ€™t expect TMC to withdraw support for the government in the next two months. However, keeping in mind that two key political parties â€“ TMC and SP â€“ stand to benefit from an early general election, the winter session of Parliament (starting in the last week of November) will be a fraught affair with the UPA facing the possibility of having to show its strength on the floor of the house (without SP and TMC support).
Note that without the TMC (with 19 Lok Sabha Seats), the UPA critically requires the support of SP (with 23 Lok Sabha Seats) to show majority support on the floor of the Lok Sabha. Our sense is that whatever it is that the UPA is trying with the SP, it is not working.
>> Coal-power-SEB tangle: None of the reforms that were announced last week can address the structural mess that is the coal-power-SEB tangle. To disentangle this mess, we need to see political leadership strong enough to take the following decisions: (1) Force Coal India to sign up to to punitive penalties if it does not deliver on its fuel supply agreements (FSAs) with the power companies; (2) Compel state governments to allow the power companies to pass on the higher cost of coal to the SEBs; (3) Force the SEBs to settle their dues with the power companies; and (4) Help the SEBs settle their debts with PFC, REC and PSU banks.
Tackling these issues needs co-ordination between the coal, power and finance ministries and the state governments. We are sceptical whether our political masters have the the appetite for a fight of this complexity and hence will watch this space carefully before becoming more structurally bullish on India.
>> Deluge of fresh paper: The government announced its intentions on 14th Sept to raise around $2.7bn from disinvestments in FY13. An educated guess about the QIP pipeline suggests that about $2 billion of equity is waiting to be raised in FY13. That suggests a total of around $5bn of fresh paper is about to hit the Indian market.
Issuance on this scale will temper the rally in the Sensex significantly (and dilute shareholders of companies with broken balance sheets).
That being said, credit should go to the finance ministry for preempting this issue by urging politicians to embark upon an â€œoutreach and appeasementâ€ programme (FIIs in the US will be at the receiving end of such a program this week and next) aimed at talking up Indiaâ€™s prospects.
Pending constructive progress on above, we will continue sticking to our Sensex 19,000 target (and hence live with the risk of the market overshooting this target).
We reiterate that the way forward is via good & clean stocks albeit with a greater weighting towards cyclical sectors (excluding banks).
We have increased our weights on the following sectors: auto (from 10.3% of the portfolio to 11.6%), auto ancillaries (from 1.8% to 2.2%), capital goods (from 2.3% to 3.2%), construction (from 4% to 4.7), industrials (from 2.6% to 3.5%), Infra (from 0.7% to 1%) and metals (from 4.5% to 7.1%).
We have decreased our weights on the following sector: FMCG (from 14.9% to 10.7%) and IT (from 14.1% to 11.1%).
Such a strategy should, we believe, give investors upside exposure to this rally and the impending economic recovery without exposing to them the busted balance sheet plays which rise and fall before you can say â€œthe India story is still aliveâ€.