Will Indian equities run out of luck soon? Elara thinks yes

Moneycontrol Bureau Indian equities might have been lucky to escape the "summer sell-off" last year backed by some short-term fixes, but things can quickly change for the worse. That’s the word from brokerage Elara Capital, which sees "a high degree of vulnerability to external shocks" for the domestic economy. "As India wakes up to an inevitable rise in pace of Fed taper, we acknowledge the gradual fund flows will inevitably result in 1) repricing of some asset classes amid inescapable volatility, and 2) a preferential ranking of EMEs in terms of domestic growth and external vulnerability is set to cast a shadow on emerging market economies (EME) currencies, including the INR. The chances of a capital flight and a strong USD are real, and EMEs could be hit on higher-than-expected equity and debt outflows, materially more than what is already priced in. In that sense, a de-jure currency war may be far from over," Elara said in a research report dated March 11.

(Also Read: Will buy IT on 20% correction, bullish Tata Motors: PIMCO)The S&P BSE Sensex hit a fresh all-time high and breached psychological 22,000 mark on Monday, backed by strong foreign inflows. According to analysts, the bull market is likely to continue and any deep correction should be used as a buying opportunity in beaten down quality stocks. However, Elara remains cautious. It highlights the fact that the BSE Dollex-30 Index, which shows the Dollar-Value of Sensex, is currently 37 percent lower than the actual Rupee-Value of the Index. One needs to understand the import of five years of underperformance and take the expectation of flows in continuum with a pinch of salt. "In our view, an impending Fed taper and a fractured electoral mandate will bring about some moderation in flow data if not outflows. The last time India saw outflows in 2011, the market corrected by 25 percent," the report said. Brace for frugal returns; Avoid "ownership risk" "We see a tepid economy with real growth of 5 percent over FY14-15E and a monetary policy biased towards inflation management as key headwinds to earnings growth. The 7K summit, which most market players are hinting at, looks difficult to surmount and the print at the year-end will more likely be closer to 6600. Given the risk that we anticipate on outflows, we see an ‘ownership risk’ to market. Indeed, quality has become pricier and runs the ‘risk of taper’.

This variable, in our view, will supersede fundamentals and needs to be watched closely. While we have consensual tilt towards a weak INR bias in our portfolio, we are different to the extent that we would prefer to own a more global business portfolio, rather than merely positioning for a INR trade. Intuitively, a lot of Tata companies feature in this list as they operate in the global markets and will get the tailwind of currency and an improving economic outlook. A beta trade and trying to time a cyclical recovery could be adventurous at this juncture and we prefer to stay defensive to that extent," the report said.

(Posted Sagar Salvi)