Tuesday, August 10, 2010 14:20 Hrs IST

Markets Could Continue To Trade in a Band & Reward Companies and Sectors with Good Growth Visibility and High Free Cash Flows

DSP BlackRock Mutual Fund's Equity Market Views

The Indian equity markets edged up in early July to touch a 30-month high before coming off partially towards the latter half. Strong inflows pick up in monsoon and buoyant tax collections have helped the market maintain its upward trajectory.

Industrial Production (IP) growth moderated, but continues to remain strong. Strong demand and rising capacity utilization could lead to higher prices and inflationary pressures in the medium term. Monsoon, has however, seen a sharp pick up and the annual rainfall is now only 5% deficient. This should help the overall agricultural production and temper inflationary expectations. While credit growth continues to be strong, deposit growth has not kept pace. The RBI has therefore raised the key policy rates and can be expected to continue monetary tightening later in the year. Lending and deposit rates which have remained stable so far can be expected to move up.

Corporate earnings for the quarter have been mixed, with good volumes but lower than expected margins (on account of rising raw material prices) in the consumer segment and disappointing revenues but better than expected margins in the infrastructure sector. The commodities sector took a hit on both revenues as well as margins while banking saw better than expected income growth helped in part by the telecom sector lending. On the global front, US GDP growth data disappointed which might help reduce commodity prices and therefore positively impact the domestic economy.

Government reforms continue to gather pace and the fiscal situation has strengthened post the telecom auction and oil price deregulation. While global economic news, foreign fund flows and monsoon remain key variables that could influence the direction of the market in the near to medium term, inherently strong fundamentals make the country well poised to deliver 8.5%-9.0% economic growth in FY11. From a valuation perspective, though Indian equities seem to be reasonably valued, the markets could continue to trade in a band and reward companies and sectors with good growth visibility and high free cash flows.