November 2012

MY TAKE ON COMING SAMVAT .....



WE ARE AT AN IMPORTANT CROSSROAD …….



Before I started working on this article (on 7th November ), I was just going thru my old articles before last 5 or 6 DIWALIs. Another DIWALI is approaching …… but this DIWALI is so much different than the earlier ones …. Earlier ones were either euphoric or despondent or apprehensive … This one is waiting for direction … with a promise to make 300/400 NIFTY points move in either direction in next 3 or 4 weeks …..

The reason is US presidential election and outcome is due in next few hours. This US election is fought on the major issue of ECONOMY as both the candidates have diametrically opposite views about the methods to be employed to resurrect the ailing economy. And the fall-out will be in the form of tremors which will be felt by the equity / commodity / forex markets world over.

Our economy is flagging and we are likely to end the year with a GDP growth of just above 5.5 %. So, the stock market is pinning all its hopes on strong FII flows to continue. We have had more than 18 billion US Dollars flowing into the markets in first 10 months. We need a similar dose in next 6/9 months to propel our stocks further and that is why the outcome of US presidential election becomes crucial.

Our political situation is such that this UPA II government cannot push thru any reforms which need legislative approval. In the month of September, administrative moves like a small increase in diesel prices and FDI in aviation / multi-brand retail were executed. Cabinet has also approved FDI in insurance and pension funds but these cannot be acted upon as legislative approval is a must and it is going to be herculean task.

RBI is at loggerheads with Finance ministry. Our Finance Minister is obsessed with growth while RBI is looking at the bigger picture and find Inflation more worrisome. RBI has already indicated that any REPO rate cut can be considered only in first quarter of 2013 – not before that. In spite of a favourable base effect, the inflation is stubborn over 7 %. If you add the inflation figures for last three Octobers, you will realize that compounding effect is more than 25 % price increase and this cannot be acceptable to any Central Bank.

JUST IMAGINE WHAT KIND OF DIWALI THE POOR AND THE LOWER MIDDLE CLASS WILL ENJOY THIS TIME ? No wonder there is gloomy atmosphere in most marketplaces although DIWALI is just a week away.

And this gloom is already reflecting in corporate top-line figures although bottom-line still looks OK …. thanks to other income and some respite in commodity prices.

Rupee – Dollar parity is another spot of bother. We have seen Rupee sliding to level of 57 and then CAD … Current Account Deficit … really started ballooning resulting into a possible sovereign downgrade and that fear is still looming large.

All in all, I am convinced that only abundant dose of liquidity can push our markets further up. It will take a while before we can justify those valuations on fundamental basis as macros will take minimum 12 to 18 months to improve.

At this juncture, I will recommend max 50 % exposure to reasonably priced blue chip equity ( avoid the likes of Titan / ITC / HUL etc ) and balance in debt which can still give you 11/12 % safe returns. This will work like a structured product wherein you will get 18 to 20 % returns on your corpus – in case market moves 15/20 % higher due to abundant liquidity while you are guaranteed of 5 to 6 % returns in case the liquidity dries up and some blue chips slip by 10/12 %.

I will also recommend to put some small amounts of money in high quality real estate and infra stocks which have clean balance sheets and have been battered out of shape. Some of these are available at 2/3/4 times earnings. Returns could be 50 to 100 % if even half of those bets work-out.

I urge all my medium term investor friends that one must keep booking profit from time to time since it is money in the bank which matters than the paper profits.

The odds are stacked against us due to poor macro and several uncertainties due to our politics as well as European issues which are still not fully sorted out. Strong FII flows can only save situation for our markets. LETS HOPE IT PLAYS OUT THAT WAY.