BZW sees economic recovery

MUMBAI, Aug 19: BZW, a leading foreign investment firm, has forecast an economic recovery in the second half of the current financial year ...

MUMBAI, Aug 19: BZW, a leading foreign investment firm, has forecast an economic recovery in the second half of the current financial year for India. “Industrial recovery is imminent, despite mixed signals being sent by the economic data,” it has said.

In its latest Equity Investment Strategy for the third quarter, BZW analysts added:“The industrial recovery will be driven by easier liquidity and an improvement in business confidence after the passing of the FY98 budget and the credit policy.”

“The falling interest rates will spur investment demand. Our earlier analysis reveals a negative correlation of 70 per cent between interest rates and industrial production. The 5.2 per cent growth (revised recently from 4 per cent) in agricultural output in FY97 and an 11 per cent increase in WPI for primary products will boost rural demand, which will be another driver for higher industrial output this year,” BZW Asia, the securities arm of Barclays De Zoette, said.

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“With economic recovery in the offing, we recommend investors be overweight on sectors geared to an economic recovery,” it said, adding “on a 12-month horizon we remain confident of an economic turnaround which will spur the market.” The commercial vehicle segment in the automobile sector is usually a leading indicator and will be a big beneficiary of the economic growth. At the current valuations, the banking and pharmaceutical sectors also look attractive. “We recommend underweight stance on the hotel sector, which is expensive at current valuations and steel sector, which is faced with an oversupply scenario in the domestic market,” BZW said.

There remains the possibility that a realignment may take place if differences increase among partners of the current coalition government. “In sum, we expect bouts of political uncertainty, which will represent buying opportunities if the market reacts adversely,” it said.

FII inflows will be sensitive to signs of an economic recovery and impending PSU divestment could slow down foreign investment in the last quarter of the year. Domestic institutional liquidity wil be neutral to marginally positive in the short term. “On balance, we believe that the liquidity outlook remains positive over the next quarter, which will add support to the fundamental story,” BZW said.

As regards the impending fear of hike in petroleum prices, BZW analysts feel that the market has discounted this and the reaction to the actual event will not be severe. It is also unlikely that an increase in petroleum product prices will cause a downward revision in earnings estimates.