Friday, 21 September, 2007

Sensex, Nifty strike new highs

It was a completely ebulient week for the Markets. Starting off on a sombre note on worries globally as a European Bank shaking up the system. However the Bank of England brought in the first trigger coming out guaranteeing all bank deposits not only for this bank but also the others and that was followed by the much needed surprise by the Fed which cut by 50 basis points This shook off the worries and Markets latched on to their highest gains ever in absolute terms. The Markets were in a frenzy and there was a strong bout of short covering.

There were gains across board. The Oil and Gas was the biggest winner led by Reliance. Reliance Petro a refinery which is still over a year away led the Nifty to an all time high and Sensex crossing the 16000 levels with ease and more than that maintaining that level. The software stocks took it on the chin with most of the heavyweights hitting 52 week lows here. Pharma stocks were the other underperformers. Telecom had a great week and Banks rallied helped by SBI which has the merger as the value creating proposition. The Mid caps however were not as active. Overall the week witnessed huge volumes and that cold fuel further momentum next week.

Our Note on Economy indicated that the Markets were ready for a big move.. and it attempted to explain the reasons for the rally.

The trigger was provided by BOE (Bank of England) s guarantees and that explains largely the rally of the Indian Markets a day before the Fed cut. Also falling in place is the fact that the rally was only led by Nifty Index stocks. That flows will continue and we believe that the Index is what will benefit. China's global funds will also flow to India and that is another driver for the Index. India is the hot place. No doubt about that !

The Rupee hit 39.80 This is clearly on the back of strong FII flows since the and even more expected. The appreciating rupee is yet another reason for the FIIs to be aggressive.. Thats additional gains.

The RBI intervened during the week but really the flows are strong and the rupee has continued to strengthen. That is a reason for RBI not to intervene. There will be a slush of liquidity in the system. On one hand there are hopes of CRR cut and on the other hand the RBI intervention will infuse more liquidity. With crude at $ 84. RBIs hands are tied. We think in the current environment, the RBI is unlikely to cut CRR yet or even interest rates. i.e bank rate. Its true that the economy growth is slowing.. but its not fallen off so its more likely to be a wait and watch approach.

This is the strategy we put out this week... and it woudl have worked extremely well for those who had teh courage to follow it.

Strategy: Follow the liquidity
Nifty would be safest to try on.. but within that we can take a shy at the sectors for interest.

Banking: SBI, ICICI and PNB. There are other issues like value unlocking.. merger etc.. and the overall Basel II norms implementation. The Insurance plays will also excite. though lack of interest rate cut could temper some gains.
Cement: This is the pure domestic play and its in the sweetest spot ever in its lifetime. Capacity additions are expected to change the picture in next 18 months. However as per market expectations, India will see the "Arrangement" (read cartel) for prices as is there globally. Tough call whether that sort of arrangement is possible in India yet with 4-5 big players such as Holcim, Grasim, India Cement, Shree Cement, JP Group and others. India Cement, ACC, Shree should be interesting plays here.. but his picks were Birla Jute, Kesoram.
Telecom: Bharti, Rel Com, Idea ; Another sector where the growth continues..although the valuations concerns are cited more often. There are issues of number portability etc.. but the sector has been able to squeeze out best for itself till date.
Capital Goods and Engg: BHEL, Larsen, Reliance Energy The order books and business visibility remains ex: Tougher credit availability for the larger projects may be an issue.. but its the investment led plays in Infrastructure which will drive the interest here.
Real Estate: DLF, Unitech, Bombay Dyeing: With again slush of liquidity expected..the real estate stories may again find buyers.
Black Box : Reliance.. This company is the pillar really and this company seems to strike oil at quite regular intervals.

Two places where we have been proved wrong and we admit that. One is on direction of metals. The slowing global environment does not seem to impact them yet. They rallied as if the rate cut in US will do away with the slowdown. The other is crude prices.. which have continued only one way. Clearly with slowing economies, prices of metals should head down. Investment in capacities has been large and the greater possibiity is that we are over the top.

Sectors to avoid would be.
Software The sector continues to lag. The two problems of higher salary costs and an appreciating rupee is now bogged with a third one of possibly lengthening business cycles. One could argue, that cost cutting measures would bring in greater business.

Autos: These are interest rate sensitives and the hopes for a cut will drive them up. We are not too confident on this one but these have been big underperformers in a rising rate environment. If one has a view that the Interest rates will be cut soon, that would be the trigger for this sector but till consumer demand picks up they may be laggards.

Important to note that the above note attempts to analyse money flows and reasons. Its not about fundamentals. Fundamentals for the Index stocks are researched many times over. It has its own set of risks.. and fundamental changes.. could impact specific stock selection. Clearly as mentioned Nifty would be the safest way to play this liquidity. The risk to this would be the emergence of the political problem. That is another month away. Another global problem is likely to be digested easily now that the Central banks have thrown their hat in the ring.

We had lots of interesting indepth research. There was one on IPO of CCCl which we think was a good idea. There was research on Gitanjali Gems.. and another on Tulip IT and yet another on Shanti Gears .. More research will follow There were notes on Aftek which had one of investments fructifying. We were the first to analyse and put that out. The note on Bharat Fertiliser had the stock moving up in circuits. The story is a good one. Do read and take the benefit of that. It is completely balanced research.

Technically: Sensex target of 16600 was reached with aplomb . Nifty levels of 5000 are possible and thats where it could be headed. Nearer stoploss is at 16100 for the Sesnex. The more important one is at 15870.. seems a bit far but thats needed post such a rapid run up. Lower levels should be used as trading opportunities.

Fundamentally Speaking: the global worries have been taken care of and the negatives are much lesser. Only bigger worries are from valuations which have become even more expensive. May be it can be said that the actions taken have delayed the pain and when they impact it could be deep and longer lasting. However that will be when they come. The problems faced are more domestic and that is from Politics, Valuations and more importantly growth. Industry is slowing. However fundamentals matter less in the face of liquidity as indicated earlier. There will be good value picks and that is additional to the large caps which could be picked. Near term the expiry of September will lead to some volatility. Its possible that the Global markets may pull back pricing in the slowdown worries. Its going to be liquid driven markets and thats when Fundamentals take the back seat. So use the Technical indicators and enjoy the ride. !