Feb 24, 2010

Moving Up Or Down?

It has been long since I last blogged about Indian Capital Markets. So I would start on a topic with a very wide spectrum.

A question that is haunting most of the Investors at this point in time is

“Where are we heading next?”

We have seen the worst and best of the times in the history of Indian Capital Markets within last 18 months. It would be a futile attempt to predict what would levels would we be able to see in short term, as usual. So without wasting time on speculating that, let us jot down the rationale in favor of moves in each direction and conclude based on the probability of one of them happening.

In Favor of an Up Move

1. There are not many negative surprises left which have not been discounted in the prices of the stocks as it stands today.

2. Although credit policy changes are expected, it won’t be harsh enough to trigger the down move. Changes would be gradual and people are getting emotionally trained factoring the same in their investments.

3. Most of the rally that we have seen in the last 12 months has been strongly supported by Domestic Institutions as compared to FIIs. Still left with a robust cash reserves, these Domestic Institutions have more appetite to support the markets at lower levels.

4. Apart from that, there is lot of cash with Retail Investors on the sidelines waiting to get into markets. If market goes down, they will not let the opportunity pass, thus supporting it.

5. Government is in favor of robust market levels as they have to materialize their plan of PSU Disinvestments and generate cash. So budget will not have many negative surprises. In fact we can see major favorable moves in budget due to lesser pressure by supporting parties as government has majority.

6. Indian markets have been in a consolidation mode for the last few months.

In Favor of Down Move

1. Valuation of the Indian Markets is still expensive, based on P/E considering the up move of 100% from the lowest levels.

2. China has started letting YUAN appreciate against Dollar to help the growing credit crunch. They have more than doubled their US currency reserves in last few years. However, this would also adversely affect their product prices and services which become expensive for the rest of the world and hence losing the competitive edge. This would result in the decline in GDPs and earnings forecast. Also the concern of asset bubbles in china, which if bursts, will in turn trigger a sell by FIIs in china and thus emerging markets affecting India and world.

3. US is still not out of woods. A temporary support has been provided by Government Stimulus, but it has to roll back some time soon. There is a lot of bad debt on books of US banks to be offloaded. However, government aid and stimulus has given them strength to bear it. This time if something bad happens, government will not be able to provide same support as Medical Benefits are a major concern, for which government is short of funds.

4. Inflation is still a concern for India. Food Index has gone up rapidly and government needs to check it. If drastic steps are taken with the sense of urgency being more severe than expected by majority of the market players, would trigger a sell in the Indian markets.

5. Dollar is going strong and the trend looks upward. If that happens and if china’s growth slows down, then industrial commodities will be impacted badly.

So looking at all the above points and giving weight age to them, if I were to conclude on my analysis, I think in short term we will remain range bound. In long term, we will remain range bound or see upside depending on how the global stories unfold and timing of the same. If we see negative surprises in the budget, then we can see a sell off which would be supported at lower levels and hence a crash is not an option for me. Correction is inevitable and even healthy for the markets.

My strategy would be to

1. Book partial profits on the stocks that have run up very sharply.

2. Book partial profits in rate sensitive sectors, if it is giving you reasonable returns.

3. Avoid fresh exposure to stocks until budget. Things will become clearer on budget day.

This analysis is purely on basis of fundamentals. If combined with technical charts will make more sense. Sadly I am not knowledgeable about them.

Note – These are my personal views. I might be wrong at it. I would appreciate a feedback and am open to discussion on any of the above mentioned points.

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