The stock market rally continued in the month of August. The outcome of the elections and expectations of better economic growth in the future, continued to propel the markets to higher levels, despite geopolitical and monsoon concerns. Global markets also ended the month largely in the positive zone. Geopolitical tensions eased in Israel-Gaza but continued to simmer in Iraq and Ukraine. The US authorized air strikes on Iraq. Mistrust continued to prevail between Russia and Ukraine.
In India, economic data is suggesting that growth has likely bottomed out. 1QFY15 GDP growth improved to 5.7%, with a pick-up evident in industrial production and electricity generation. Auto sales are looking up and so are the tourist arrivals. Crude prices have softened and the subsidy on diesel has now fallen substantially. Having said that, we note that the economy still faces challenges emanating from a deficit monsoon and its upward risk on inflation. The core sector growth decelerated to 2.7% in July, partly due to a higher base.
In the short term, geo-political factors and the progress of monsoons will take most of the attention of the market.
Valuations have reached the long-term average at about 16x FY15 consensus estimates on the Sensex and may weigh on the markets. Over the medium-to-long term, the decisive mandate in elections is positive for the economy as well as the markets. We do expect strong reform initiatives from the Government in the months to come. Thus, we remain positive on the domestic infrastructure and cyclical sectors over the medium-to-long term.
However, after the steep run-up in several of these stocks, we recommend selectively investing in stocks having strong balance sheets and ethical managements. On the other hand, we are positive on select export oriented stocks based on improving demand scenario in developed economies.
We expect rupee to remain in a range. Full Coverage: Indian rupee vs US dollar, others
Key risks to our recommendation include geo-political concerns globally, decline in foreign inflows, sharp currency movements and spike in oil prices.