2011 saw economies both in the developed as well as the developing realm struggle against issues related to deficits, debt, downgrades, corruption, policy paralysis, social and political unrest. Although India had started the year on an optimistic note, with the Sensex at 20,000-odd levels, slowing investment cycle, high inflation and rising deficits ensured that we ended the year as one of the worst-performing stock markets. So what could trigger a turnaround in India this year?

One, crude oil prices correcting significantly will help address deficit problems. Two, improved and speedy implementation of policy, coupled with confidence-building measures to revive the investment cycle. Given that Indian equity valuations are still at a premium to its emerging market peers, we expect markets to recover during the course of the calendar year. We see the consensus earnings downgrade cycle continue in the near-term and ease later. We would recommend investing in a calibrated manner during the next few months. Investors should opt for Systematic Investment Plan as a preferred mode of investment in such times.

While India is well-placed in terms of its low export dependence, and want of leverage in the financial system, weakening business confidence could have an impact on investments as well as loans. Investors are looking for clear signs of policy resolve to address the critical issues facing the economy, and any progress on this front will be good. Apart from the cyclical headwinds we had witnessed during 2011, some other factors to watch out for are the possibility of increased non-performing assets and losses in the state electricity boards.

The underlying strong economic fundamentals remain intact - demographic dividend, rising income levels and expected increase in infrastructure spending. The quarterly results from Corporate India have indicated that well-managed companies have been able to do relatively well in this challenging environment. While margins have been under pressure due to higher borrowing costs and rising input prices, top-line growth has been steady. Companies with strong market positions and pricing power are expected to fare better than general markets, reiterating a case for bottom-up stock picking.

FRANKLIN TEMPLETON INDIA INVESTMENTS

The first half of 2012 will continue to see volatility in the global equity markets, and India will be no exception. We expect the volatility to continue due to slower-than-expected policy reforms, subdued corporate profitability led by higher global commodity prices / input costs, in turn leading to a demand slowdown in the first half of CY2012. However, we expect inflation to fall to 7 per cent by March 2012. This, along with a slowdown in GDP growth, will force the RBI to look at loosening the monetary policy, which will be viewed well by the market. Thus, with most of the bad news behind us, Indian equity markets could pleasantly surprise us in 2012. We will continue to invest in companies that offer a high growth visibility, generate free cash flows, and have good governance. Despite the current volatility in the global and local markets, we believe that any large correction in the market should be taken as an opportunity to invest from a two to three-year horizon.

DSP BLACKROCK MUTUAL

Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

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