Equity markets world over have moved up sharply in the month of January 2012. Indian market has been the best performer during the month after a miserable December performance. The sharp rally has taken many investors by surprise and they are now wondering whether they have missed the bus! Wait before you jump on to catch the moving bus i.e. committing funds to equity at this juncture. The markets are under the influence of excess liquidity, and have moved up faster than the comfort level of most analysts/ investors, and therefore, a correction is in the offing very soon closer to the levels of 5400 on the Nifty (18000 on the Sensex).
Let us analyse the prospects of equity market movement in the current scenario:
- The good news is that the Indian market seems to have made a bottom at 4531 level on Nifty reached in December 2011. It has made a higher top and has surpassed the 200 DMA (considered as the major hurdle).
- In all probability the market will try to make a higher bottom in its next correction, which may start anytime now. Investors can expect the market to make the next bottom in the range of 4850-4650 on the Nifty.
- As anticipated by me the first positive trigger for the market came in through the RBI policy review on January 24, which cut the CRR by 50 bips, and signalled the end of the high interest rate regime.
- The next positive trigger could be the Union budget for fiscal 2012-13 to be presented in the middle of March '12. Before that the state election results could bring a positive surprise for the ailing UPA govt. It could snatch power in one of the states: Uttarakhand/ Punjab and could be in a commanding position in UP.
- The rupee has bounced back sharply to 48.70 to a dollar from 54 levels reached earlier during the month, proving sceptics wrong. It should consolidate in the 48-51 range till March 2012.
- The Euro zone crises would come back to haunt the markets intermittently, so a runaway upward movement in the markets is not possible till the second half of fiscal 2012-13.
- Analysts consensus estimates of Nifty touching 5800 by December 2012 is reasonable.
- My personal take on the markets is: After the initial correction towards 4850-4650 on Nifty, Samvat 2069 (Hindu new year starting on 23rd March 2012) promises to take the market to new highs: Investors can expect the markets to top 6300 on Nifty/ 21000 on the Sensex by March 2013.
Guidance for investors: Any investor entering the equity markets should target a yearly return of at least 18-20%. That is when the risk reward ratio turns attractive. By this logic entering the markets at 5400 does not make sense, one must wait for the market to correct by 10% from current levels to reap due rewards from equity. Anything above 18-20% should be treated as a windfall. The long term trend for Indian equity markets has turned positive and we could see a sustained bull run for at least 3 years from second half of fiscal 2012-13, if things remain stable on the political front.
About investment in debt: As stated above the interest rate cycle has peaked. Investors seeking to invest in debt should commit funds for long term (put money in bank deposits/ long term debt funds for 3-5 years) as banks will start cutting deposit rates soon.
