Friday, December 16, 2011 15:30 Hrs IST

We continue to focus on companies with strong balance sheet and cash flows and lower debt

Equity Market Outlook: DSP BlackRock Mutual Fund

• Indian equity markets (BSE Sensex) were down 8.91% (in rupee terms) in November driven by both global and local factors. We expect the volatility to continue for some time in the near future mainly due to the problems locally in terms of higher inflation, slower than expected policy reforms and the impact of higher interest rates. The rupee depreciation (down ~18% calendar YTD) will further add to the pressure on earnings and profitability of companies.

• With the Q2FY2012 GDP growth rate falling below 7%, the market will keenly watch any future action by the RBI which had already hinted at a pause in the rate tightening cycle in its mid year monetary policy.

• We expect inflation to start moderating from December 2011 and could fall to around 7% by March 2011. This will be driven by a positive impact from falling global commodity prices and the positive base effect. Recent fall in primary articles inflation on account of falling food prices will be positive.

• The rupee has corrected ~18% calendar YTD. The sharp fall in the currency is a result of dollar buying by local refining companies, short supply of dollars globally making it the currency of choice and flat foreign flows into India this year to date compared to USD ~30 billion inflow in 2010.

• We continue to focus on companies with strong balance sheet and cash flows and lower debt. Though we are adding to beta in the portfolio with buying stocks where valuations have been beaten down substantially. We are increasing our exposure to the banking sector including public sector banks where valuations look attractive and much of the bad news is in the price.

• Overall, the markets may remain cautious on growth concerns and lack of clarity in the euro zone. Though any large correction in the market should be viewed as an opportunity to enter from two to three year perspective.

• At 16,123 the BSE Sensex is trading at 13.2x 12M forward earnings which is below the 15-year average P/E multiple for the market.