Video blog with Parameswara Krishnan

The recent data points on GDP growth put growth in the fourth quarter of last year at below 5% which was a clear disappointment for the market. The market also reacted adversely to the budget proposals presented by the Finance Minister in February. The concerns were on specifics on deficit reduction in the budget, however it was also the case that the market was a bit overextended after the strong rally that happened in the latter part of 2012, and a reality check was in order. In our opinion the government is well on track to control spending and has done a lot of incremental steps in correcting the problems in the economy. All the legal steps have been done in a fairly efficient way by the government over the last few months and the government is on track to continue doing the same for the rest of the year.

India is on a path to a cyclical recovery in its economy; we are already in the early stages of the same. We expect this recovery to be broadly in three phases: In the first stage, the recovery will most probably be led by a revival in export trends. This is partially because of the somewhat better sentiment around the world and also in part helped along by the fairly significant appreciation that the Indian rupee has had over the last 12 to 24 months. That should benefit exporters; we are already seeing some signs of export revival from India. In the second stage, we expect the beneficial impact of interest-rate reductions which are already underway to kick in. We also see inflation slowly trending down, in part due to the heat on the growth that has happened over the last few quarters. Inflation is beginning to respond to that. A combination of these two would result in some sort of revival in consumption, particularly in urban consumption. The third stage of the recovery of course will involve improvement in investment spending or capital spending. This is probably a tough one and the most difficult part. And in all likelihood will happen towards 2014 and in all probability after a new government is in place. However even on the capital spending part, the base effect from a very poor show in 2011 and 12 should help the outlook for 2013. So in summary we see things improving for the economy all through this year but in a gradual and calibrated manner.

We expect the stock market to discount the revival in growth as the year progresses. The earnings cycle should also turn positive as we go forward into the year, albeit in a very calibrated manner. So our positioning in the portfolio at present reflects some of the views expressed on the economy, on growth and the pattern of growth that we foresee. Quality should continue to trade at a premium as in 2011 and 2012. On the sectoral front, we are constructive on the IT services space, which clearly is a beneficiary from both export revival from out of India and the positive trends we are seeing in the US. We prefer to play the expected economic recovery in India through the banks and good-quality bank at that. We continue to lay a heavy emphasis on bottom-up stock picks and some other secular themes such as in the expected improvement in gas availability in India a few years from now which will have a very beneficial impact on some of the gas plays which are very attractively valued. We also want to play the government governance improvement expectation for this year through some stocks in the oil sector where we are positioned well. What we are at present avoiding are hybrid consumption names broadly speaking because near-term data could disappoint over there.