Monday, September 14, 2009


Where is market headed?
From A K Prabhakar
19000 or 12000 In Sensex in next 6-8months
This has become the most difficult question to answer, as majority of analyst feel market has fully priced in all future positive while negative like ballooning budget deficit, monsoon, fragile global recovery fully on stimulus package, lack of reforms and RIL-RNRL conflict. We will see analyze all below
                                     
Economy
Positives:

  • Stable government at centre with less of coalition pressure and continuation of policy in these difficult times of global turmoil and global recession.
  • Globally many countries have managed to come out of recession and are showing positive growth, and India also has managed well it’s slow down with 2 stimulus package and election spending.
  • NELP policy of India started to benefit the country with Reliance KG-D6 basin and CAIRN starting to produce Oil & Gas which would balance Indian trade and more availability of gas would secure fuel for energy starved country.
  • India Auto industry has made best use of the vacuum created by global auto major where high cost + fuel guzzlers where replaced by fuel efficient mid price segment cars found bigger export market going by data available.
  • Indian IT companies have benefited from global recession as they have helped many companies to reduce cost and improve productivity and India is becoming Global hub for KPO-Knowledge process outsourcing with already BPO also picking up.

Negatives:

  • Corporate India profit was up 17% in Quarter ended April-June 2009 while sales dropping -5% and this has been possible mainly on account of cost cutting measure and AS-11 accounting standard where many companies reversed their Forex provisional loss into profits (41% higher other income) and this Quarter result will miss this advantage.
  • Banking was one industry which showed excellent results and now that sector would be watched keenly with Bond prices moving up and Banks unable to lend and total banks investment in last 4month is 1lac crore in MF liquid scheme.
  • Trade internationally has not picked up and Baltic Dry Index is showing signs of weakness and for 11months in a row our exports has fallen but our trade deficit also narrowing down which can be mild positive.
  • Government budget deficit likely to push interest rate higher and government at this stage where monsoon is below normal cant withdraw welfare scheme and it has to increase rural spending to compensate and improve rural economy.

Fundamental View: Nifty50 12month trailing P/E is 21.70 and Sensex 12month trailing P/E stand @21 while BSE500 P/E is 21.21, with most of the Mid & Small cap stocks catching up, pockets of value is fast diminishing. If India grows @ 10-15% then risk to reward would not favor bulls in short to medium term and market has almost doubled in one year from low of 7693 a day before Diwali where I had said it is goanna rain in Indian stock market and introduced Compact15. IIP data has been positive after RIL gas was made available and other discovery which would come stream would add to India’s growth.
 
Reforms: Market gave thumb-up on UPA winning election by hitting upper freeze on both exchange on hope of faster reform and after 100days in power things have not moved but very short time to judge the performance,  in my personnel view Government seem to be in no urgency and adopting policy of Aam adami which won them election. Labor reform/Legal reform/Land reform are very important. Economic downturn has given way to labour unrest. The past year has seen a rising incidence of labour strife in India, with strikes at Hyundai, Mahindra & Mahindra, Nestle, banks and oil companies. The dissatisfaction varied from delayed wage negotiations to appointment of contract workers to summary dismissal. Jet Airway Pilot strike, Hyudai, M&M, MRF strike has put breaks and clarity in labor reform has become important, Ramalinga Raju and  Nithari case shows delay in our legal system and loopholes as justice delayed is Justice denied and Land has been centre of controversy. Added to these there are many micro and macro reforms which needs urgent changes.

Protecting Domestic Industry: Many countries, after recent recession, have understood the importance of domestic industry in development of economy and the most prominent change has been from USA which was the biggest consumer, containers dispatched to US would always come back empty. But now even USA is protecting its own industry as it takes strict policy against outsourcing in new Obama Administration and even affecting Chinese industry as just a day ago US imposed duty on imported tyres from China to discourage more imports. India has also seen drop in exports for 11months in a row due to global downturn but our industry must be protected more to avoid such things from happening again.

Foreign Relations: In recent past, our relations with our neighbours have become worse as terrorist activity around border and recent Chinese incursions into Uttarakhand border have made policymakers think twice about how to protect border area. History tells us that India has not had a friendly relationship with any neighbours and we have more foes than friends now, even Nepal after recent Maoist changes, is not a very good friend as it was before that. Massacre of Indians in Australia is one more case in point where India has lacked the strict policy stance, the message should be loud and clear to the outside world that India won't tolerate such things. Sterner stance on black money in Swiss accounts is not developing due to much of red tape and obvious political difficulties, but US has unearthed the names of tax-evaders through UBS, why can't India do it?

Technical aspect of market:
Nifty and Sensex has given a break-out from the trading range and trading near highest level of 2009 and many Index stock have made all time new high and clearly trading above all average short & long term all indicating strength but Derivative data suggest otherwise. Running correction normally has a unique way of moving higher creating new highs before market correct as we have seen during November 2007 to January 2008. Any weakness in Nifty comes below 4400 only till then this market correction are normal.



 
                   Nifty                                      Sensex
14EDMA=4715                                           15851
50EDMA=4530                                          15226
100EDMA=4327                                         14495
200EDMA=4107                                         13708

Derivative Outlook:
PCR=1.39 highest since January 2008
Overall Open interest is 1, 03,365crs almost near peak of January 2008
VIX- is low which indicate implied volatility is low and any direction market takes would be with vigor.

History: Last year the final phase of correction started during Sep 2nd week and ended before Diwali and Hindu inauspicious month has made local investor book profit. Hedge fund will know the amount of redemption by end of this month and traditionally they book profit in October for redemption.

Risk: Many retail investors have invested seeing the huge return equity market has given in last one year and their expectation is very high from market and with Derivative position very high after January 2008 leverage trader can soon feel the pain. But excess correction and pessimism led to this rally where chance of excesses on positive side would create bubble and risk to reward ratio is not favorable in my view and holding cash level above 60% would do good.

Conclusion: Everyone is aware of all the facts and figure and confusion is all around and caution is seen on both sides, bullish on long term no one has any doubts after 5-6 years markets will be more than double from here but is the pain over. Economic recovery has been on stimulus and continuing stimulus for long with create excess and can lead to more problems latter.  Many talk of V-Shape recovery while few talk of W-Shape recovery, the problem comes only if this recovery is W as the correction could be deeper and this time recovery will not happen so fast as it did before and for a recession which is worst in 80years things can turn worst before it can get better. Times have changed and world is better equipped to deal with help of past history but investor avoid being euphoric in next few week advance tax figure will be known and results also will flow in next 30-40 days this quarter would be important to judge if there is real overall growth and Global Hedge fund allow their clients withdrawal once a year and all maturity will be known end of this month.

Economic downturn sees an upsurge in labour unrest http://www.business-standard.com/india/news/economic-downturn-sees-an-upsurge-in-labour-unrest/370012/ 

 

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