5 reasons why Indian equities are not attractive in the short term

Updated: Monday, August 6, 2012, 9:09 [IST]

5 reasons why equities are not attractive in the short term

Indian equities have always traded at a premium to global peers. The premium being paid by investors is essentially for chasing growth. However, with corporates growing at a slower pace, the premium with global peers is likely to shrink. Here are a few other reasons why Indian equities may not offer great returns.

SP, TMC unlikely to allow reforms

The Samajwadi Party and the Trinamool Congress are unlikely to give the Congress any elbow room to push the reforms process. The Samajwadi Party has made it clear that it is opposed to FDI in multi-brand retail. The TMC is opposed to the Pension Reforms Bill and FDI in multi-brand retail, while Chief ministers of non-Congress ruled states are opposed to the Goods and Services Tax (GST). The TMC is also unlikely to allow any reforms in fuel.

Indian equities trading at a premium to peers

Indian equities are trading at a premium to global peers. The price to earnings multiple is close to 30% higher for sensex companies, when compared to similar price to earnings multiple for developed countries. If we do not see strong growth momentum in earnings for corporates, which is highly unlikely, the premium being paid to chase growth may erode.

Interest rates are high, making debt instruments fairly attractive

One can get high yield in excess of 10% in secure debt instruments, making yield on debt instruments fairly attractive. Unless, interest rates fall, there might not be a significant shift from debt to equity.

Inflation to stay at elevated levels

Inflation is unlikely to drop anytime soon, keeping interest rates elevated, as the RBI would not be able to cut rates. Inability on the part of the RBI to cut rates is likely to see investment fall, which in turn is likely to affect overall growth in the economy.

Populist policies likely with an eye on the 2014 elections

The government is unlikely to push through the reforms process, keeping an eye on the general elections of 2014. This means that reforms like Diesel, PLG and Kerosene price hike are unlikely to increase, putting pressure on the fiscal deficit. It's very safe to conclude that the government would be unable to meet the fiscal deficit target of 5.1% of GDP for FY 2013. If oil prices increase further, be rest assured that the fiscal deficit would balloon.

In the medium to short term, it is unlikely that the equities market will gain substantially. The only hopes for investors is to look beyond 2014, when the next general elections will be complete and a new government will be in charge.

GoodReturns.in