Betting On A Quick Recovery

It has been an amazing run continuing for the 12th week in a row surpassing even the most optimists’ expectations. Whether “India Shining” and “India Decoupling” stories are back in market? Even though, Indian story is quite intact in a longer run, whether stock markets deserve a valuation closer to the January 2008 peak levels with the economy crawling now just at a half the pace of that time? Let us introspect once again hereunder.

As we discussed earlier, market builds up lot of expectations over Manmohan Singh’s new government. It likes to safely ignore the facts that Congress is not known for speedy reforms and it has come back to power mainly because of its populist face as opposed to the corporate image of the previous NDA regime. It also ignores that the Head of Government is not the de facto political boss. He can not push through tough reforms either way as there are still many political, coalition and electoral compulsions to show a populist face.

Sensex now trades under a fair valuation given the gloomy economic indicators like negative IIP, manufacturing degrowth and GDP growth, lowest in five years, even though the business confidence is expected to improve because of the electoral verdict. Negative credit growth is a depressing factor and an important indicator that the current business confidence is quite low.

Hence, it will be too much on the part of the market to expect that miracles will happen in the short term and Sensex (Companies) earnings will move up drastically in no time. Hence, I am of the view that the any big move hereafter may be another bubble in making.

Hype is building up in the market that there will be a huge divestment of PSU companies in the short term which will take the market further up. It defies the fundamentals of supply and demand. Divestment is good for the small investors no doubt but there are hardly any reasons to chase the costly listed companies with weak fundamentals when there are plenty of fundamentally strong PSU companies are going to be available at much cheaper valuations.

I would suggest the readers to continue their value picking in small lots over a period of time. At the same time, there should not be any “there is no tomorrow” approach. There will be a plenty of opportunity for the small investors to participate in the PSU divestment process that is going to happen shortly.

Nifty may face some resistance between 4500 and 4600. Stronger resistance may be there around 4800 levels. There is huge build up in F&O position and hence it is safer to trade with strict stop loss limits.

Wishing a very happy week ahead

Left is left out?

Last week has been a dramatic one for the markets. Key indices posted historic gains and the market was shut on an upper circuit for the first time in the history. Decisive electoral verdict for a reformist Prime Minister this time relatively free of coalition compulsions lifted the mood of the market.

Now there is a feeling of being left out among the investors from the last rally in which key indices nearly doubled from their bottoms recovering around half of their total fall. There has been a mad rush in the market last week which witnessed a historic gain and turnover.

Whether this jubilation is justified? Whether every thing has changed in India all of a sudden to become so bullish once a stable Congress government is in place?

One should have strong introspection now. In fact, Congress was in power in the last one year also almost with full control of the government particularly without any Left pressure. What it did to revive our economy? There were two or three very small fiscal stimuli making no major impact on the economy. Further, one should also remember that Congress has always been a centrist party with a socialist face. In fact, the 1991 reforms were more of a result of compulsions from IMF rather than a voluntary one.

Even the current electoral success is owed to the populist measures like NREGS, Farm Debt waiver, fuel subsidies and Pay Commission undertaken by the Congress government as it was very much aware that the corporate image of the previous NDA regime was the main spoiler for NDA in the previous elections. Hence, it is very much doubtful that the Congress will go for aggressive reforms risking its electoral successes in the future. Rather, it would like to carry on its socialist posture and doing some reforms here and there in bits and pieces.

Hence, we may conclude that the market jubilation for a Congress government is an overreaction. Even though the long term story of India is very much intact and the key indices may very well cross many new highs in the future, short and middle term success of our market will be mainly dependent on the following factors.

Ø Mounting Fiscal Deficit which is the biggest threat for our growth.
Ø Slow down in economy and degrowth in industries.
Ø Falling exports of goods and services.
Ø Low WPI Inflation resulting in high real interest rates and persisting credit squeeze.
Ø Global recession particularly the US recession may hurt us.
Ø Falling profits of the listed companies and their poor corporate governance record
Ø Last but not the least, infrastructure bottlenecks.

It will be a challenging situation for Indian economy and its corporate world to recover quickly.

In my view, Nifty is now placed at a fair value with its Price-Earnings multiples at 16-17 levels. Any big rally from here onwards in the short run may be a bubble in the making. However, there are many small and midcap stocks trading at attractive valuations. But they have to be picked only after a careful analysis of their fundamentals under necessary professional guidance.

Nifty faces a strong resistance at 4500 levels breaking which it may move towards 4800 levels. It has a strong support at 4150 levels and any fall below this level may take it to 3900 levels.

F&O open interest has gone up very much in the recent times. There is a market talk that FIIs are now selling in F&O market even though they keep buying in cash market. Caution is the key word now and any trading position should be accompanied by strict stop loss limits.

Wishing a happy week ahead!