The third-quarter report from BZW India (January-December) has forecast that FY98 earnings will grow by 18%. Thus, industrial growth is expected to be strong in the second half, considering that the report expects the first half results to be relatively poor. In the event of a poor first half coinciding with weak economic data, the market sentiment will receive a setback. An industrial recovery is imminent in the next twelve months which will make the markets extremely bullish. Till the time clear signals of a revival emerge, the market is expected to move in a narrow band. The report recommends investors to overweight automobiles, banking and pharmaceuticals and to underweight steel and hotels.

With economic recovery in the offing, the report recommends commercial vehicle segment in the automobile sector, which is a big beneficiary of the economic growth. While banking and pharma stocks appear attractive at current valuations, hotel scrips are expensive at current valuations and the steel sector is faced with an oversupply scenario in the domestic sector.

The reasons behind a resurgent economy in the coming months are not far to seek. After some initial anxiety, the successful passage of a industry friendly budget and the drop in interest rates has restored business confidence to a certain extent. Post-credit policy in April, interest rates have dropped by 200 basis points while in the last quarter, yield on long term government paper has fallen further by 150 basis points. With a further cut in the bank rate to 10 per cent in July, money supply has eased once more, which is likely to give a fillip to investment and demand.

The news from the agriculture sector is encouraging with an upward revision in agricultural output from 4 per cent to 5.2 per cent for FY97 and a 11 per cent rise in wholesale price index for primary products. Both the factors will spur demand in the rural sector, which has been the focus area of the corporate sector during the past few years. Thus, demand from rural sector will help push up industrial production.

Over the past couple of years, a strange correlation has emerged between politics and stock markets in the Indian context. Political upheavals and realignments, which besides uncertainty and a sense of despondency, now also bring with them buying opportunities if the market reacts adversely. The report says, ``In the last quarter, the Laloo episode kept political uncertainty to the forefront, but the market maintained its buoyancy. In the event of a mid-term poll, the risk of a stronger BJP will keep up pressure on the current coalition to stay together. In sum, we expect bouts of political uncertainty, which will bring buying opportunities.''

In a liberalised regime, FII investments are also an important indicator of an economic recovery and India's case is no different. As witnessed on numerous occasions and during the current rise in the market, FII investment plays a dominant role. However, there is another cult of retail investors, whose presence in the trading ring is pertinent for a sustained rise in indices. If the rally in the cash group shares is any indication, the retail interest in the equity market is once again building up. According to the report, the response to the ICICI Bank issue will provide good evidence of retail interest.Though it's early to comment on a primary market revival, the signs are definitely positive, encouraging.

The dilly dallying over a petro-price hike is a cause of concern and the burgeoning oil deficit needs immediate attention. On the vexed issue, the report states that despite repeated attempts, the government has failed to reach a consensus for pushing through a price hike for petroleum products. ``The oil pool deficit touched Rs 180 billion in FY97 and is rising everyday. A rise in prices of petroleum products for bridging the deficit is inevitable, but we believe that the market has discounted an increase in petroleum prices and the reaction when the hike comes in will not be severe. It is also unlikely that an increase in petrol price hike will lead to a downward revision in earnings estimates since it has been factored in most analysts' earnings forecasts.''

Automobiles: The auto sector has underperformed over the past quarter, because of a dip in sales. However, the trend is likely to be reversed when the economy begins to pick up. Fears regarding a diesel price increase has subsided, given the conflict in the government.

Banking: Despite the banking sector's asset growth of just 13 per cent CAGR over the next two years, falling provisions will lead to earnings CAGR of 28 per cent during the same period. As the economic revival gathers momentum, banks will benefit from improved credit offtake and better spreads. BZW expects bank stocks to outperform once signs of economic recovery are evident.

Steel: Due to higher exports and a slow increase in steel demand, steel sales in the first quarter of the current fiscal were up by five per cent over the corresponding period. Although steel demand has shown signs of improvement, oversupply in flat products is a cause of concern.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.