Sunday, 2 September, 2007

Markets – A Bird’s Eye-View

To all my beloved boarders, my assumptions and presumptions on the Markets for the next few days…...We have just bounced from a recent low of Sensex at 13650 after a well deserved correction of over 2000 points. We are now, just a few hundred points away from the all time high and the Indian mob-psychology is such that this range can be achieved on the very next trading session on Monday. Here when it is buying everybody wants to buy and when it is selling everyone wants to sell, hence the volatility and over-reactions. This is something like a computer havoc created in US market in yester-years, probably due to simultaneous stop-loss triggering. What do we have in store for the immediate future; it is much more than a million dollar question. As suggested by our beloved Pranky, I am attempting to put together certain food for thought for all of you.

Indian economy is on a threshold of vibrant growth, articulated by eminent personalities like our PM Manmohan Singh and FM Chidambaram. It is not just that they dream about a robust and vibrant economy, they also attempt to make it happen. In today’s quarterly review of GDP growth, FM has come out with some of his plans. i) To ensure investments remain buoyant ii) Productive sectors to be given enough loans iii) Keep investment and Manufacturing sectors robust iv) Promises 9% GDP growth to be realized in FY 08. More than anything else, it sounds like we have a working govt who means business. If these are FM’s dreams, here is what he achieved in the just concluded quarter. i) GDP Growth at 9.3%. against 9.6 ii) Inflation is under control at 3.94 for week ended 18 Aug down from 4.1. iii) Agricultural production 3.8% up from 2.8. iv) Manufacturing growth 11.9% against 12.3. These are by and large an excellent set of figures by all standards. India will continue to grow with rapid strides and we could be an economic super power 3rd to 5th position all world, by 2050, next only to China. Everything else is acceptable, we must avoid any wars with any other countries and Defence Budgets be kept under check by reducing the expenditure for arms & equipments.

Political stability is a must for any thriving economy. We have a Coalition Govt, supported by the Left Parties. The supporting parties still believe that they can garner votes in next election by old gimmicks of “party of the Poor”. But they do not realize that India has fewer men below poverty line today than before, thanks to the growth India has already achieved. Those who are BPL, few of them are only educated and others rarely go to vote even. Thus the Communists are likely to reduce their vote bank in every consecutive election from now on. They know it themselves. Hence, going for an early election is detrimental to the Left. 123 Nuke deal should be buried and never to be brought back to the markets other than to assess its direct positive effects on sectors like Power. Operationalisation of Nuke Deal is required only by October 2008, hence the Congress accepting to put it on hold has no meaning at all. Hence we are having the cake and eating it too! The Left has stood their Gun. Govt pretends they have accepted the Left Demand and finally Govt will implement the Nuke Deal in Oct 2008. It makes no difference to the Congress, whether or not Left withdraws support thereafter, since it is almost time for the next election in a few months. Moreover, it is widely believed that the Congress will return to power again and the new dispensation may do without support from the Left. This will pave the way for a smoother economic management.

RBI and its policies have a direct bearing on the markets. Interest rates had been going up for quiet some time now. Last time the rates were put on hold and next time onwards, rates are likely to be slashed. Interest rates and CRR could affect the liquidity in the markets. Tight policy and control on inflation will be the matters to be achieved like a Rope walk. Housing, Banks and Auto sectors will be seriously affected by these announcements. Most worrying matter is the rising Crude Prices, hovering above USD 74/bbl as on date. India is a net importer of crude and our maximum foreign exchange outflow is on this account. Disruption of production due to natural calamities, strike and accidents apart from increasing and decreasing the output by OPEC etc affect the Crude Prices. Increasing crude price will affect the Oil Sector, particularly those who import crude, Airline companies and Auto sector. ATF price is revised every month by the Public Sector Oil companies and this has a direct bearing on the Aviation sector. Oil sector is on the verge of an exploding growth. Companies like Reliance are striking it rich, particualrly in the East Coast. Rupee appreciation against Dollar is a negative for the IT sector and companies thriving on exports apart from remittances from NRI sources. A good monsoon every year is something which the market always look forward to. This year we had a good monsoon which will help us have better agricultural output. This will indirectly help Fertilizer companies, Tractor, Truck and Utility vehicles manufactures and Irrigation Equipment manufacturers. Common man will have more money to spend, thus purchasing power increases and the manufacturing sector will be benefited too. Steel consumption in India is much lower than its peers and expected to double by 2015. Even worldwide consumption of steel has created a demand supply gap. Infrastructure and Housing sector are having a super boom in India. Steel and Cement sectors will be the major beneficiary of this construction boom. Price of steel nationally and internationally are rising, Cemet prices are also on the increase. Newly formed Realty sector, Banks and Housing Finance companies will also be benefited. In fact, Realty sector is expected to emerge the ‘Sector of the Year’. Shipping industry fortune is determined by the Freight Rates prevailing and it is on the rise. It runs more or less parallel to the crude Price. Chidambaram’s forthcoming Budget is to be watched curiously. Any populist budget will indicate earlier elections and disadvantage to the economy. Soon after passing the Finance Bill, Left Parties are likely to wait for an opportune reason to bring down the Govt. If this does not happen, that means the elections will be after full term of Manmohan Singh and the Left will act like a good brother and go for tactical alliance with Congress during the next elections. This augurs well for the market. If that be General Budget to be presented by PC in February next, it could be a growth oriented budget and augurs well for the markets.

Of late, Indian markets tend to go congruent to the world markets particularly US. So, it is essential that investors look East in the morning and West in the evening before they execute their opening trades. In September, we have the following important dates. 06 Sep: ECB to decide on interest rates. 18 Sep: FOMC to decide on interest Rates – soft landing expected with a 25 basis point cut to 5.0%. Markets will look forward to two more similar cuts, on in October and another before the year-end. 19 & 29 Sep; BOJ to decide on interest rates. In US, there is a possibility of 2-3 rate cuts this year, each of 25 basis points. US slashing the rates will positively influence the world markets. Inflation figures being down, RBI may also go in for a rate cut in its next review. Sub-Prime issue is under control. Today, President Bush has reiterated his resolve to help subprime borrowers avoid foreclosure; however rejected bailout of speculators. Fed Governor Bernanke said that Fed will act as needed. This has already pushed the US indices up. However, US Markets are traditionally weak in September month. It is to be seen how far the rate cuts or expectations of rate cuts, will help to prove this wrong. Monday will be holiday for US markets, being Labour Day.

Immediate outlook for Indian bourses are positive. Sensex is sure to test the previous top, if not crossing it to indicate continuation of the bull trend. Companies like Reliance is already at all time high. Tata Steel, R-Com, HCL Tech, Maruti, Tata Motors, ACC, ICICI Bank, SBI and most scrips in Realty sector will soon be flaring up to test/cross the previos high. Short Term Investors may find 15050-15060 as support and Medium Term investors may keep 14450-14460 stop-loss on Sensex. Govt is mooting to declare a comprehensive Fertilizer Policy soon which will help the sector which was lying dormant for some time. Some sops for the sugar industry is also on the anvil. Oil Companies have declared a cut in ATF prices for September. However the cut is not as much expected due to crude prices being high. Just Rs 896 reduced against an increase of Rs 1053 in July followed by 1260 in August. Even after this reduction, cost of ATF is still more than that was charged in Nov 2006 to July 2007. Hence, advantage to Airline sector is nominal. Increasing crude prices will prompt the Govt to increase the fuel prices in due course. Inflation being under control, a rate cut can be expected very soon.

Immediate outlook for IT, Auto and Airline stocks are bleak. However, superb sales figures from Maruti for Aug 2007 will see hectic buying in this counter, probably soon to reach all time high price. Friday’s spurt in Airline stocks had been due to news that Oil Companies are reducing ATF price. ATF price announced for September is still costlier than that was fixed in July and the reduction was less than expected in market circles. Thus no major benefit to the sector as price is already reflected in today’s spurt. Weak dollar is a concern for the IT sector companies. Metal sector, particularly Tata Steel, SAIL & Cement companies will benefit from the Realty, Infra-structure & Construction sector boom.

World markets including ours had 2nd weekly higher closing, after the recent fall. All markets are in an uptrend. So far as DOW remains above 13000, I do not think US markets will bother ours much. US Administration will do anything to contain the sub-prime fallout, as they would not allow their economy to suffer and this issue should also be kept in the back-yard now. Recovery in Emerging markets were sharper than ours. Locally, addition of 14 more scrips in F&O will boost the market morale.

Next few days, as and when the Indices and individual stocks reach the previous highs, if one can see lot of churning around in the markets by virtue of investors re-shuffling their portfolio, that will be a clear-cut indication of continuation of the bull-run. If not, a temporary setback from that level is possible to bring the Sensex lower to previous low, 13650, at least. In coming days, you will also notice that mid-cap and small-cap stocks will have wider participation. Taking into consideration of all the above, market will be hovering in the region 14660-16500 till Diwali. Short term traders may keep 15050 as stop-loss and medium term investors may keep a stop-loss at 14650. For Long Term investors, I would say, any correction in the market be considered an opportunity to buy growth oriented value-stocks. As of now, the peak is not yet in sight. There is no point in hitting a blind figure, however, I will dream something like 18500 in the year 2008, it is not so far, well within reach. Just imagine, we have retraced almost 2000 points in less than two weeks, then another 3000 points in a year is not a big deal.

My Hot favourites: UNITECH, R Com, Tata Steel, HCL Technology, Reliance, Maruti

Happy Investing!!!

Joe tom. mmb