Sunday, May 18, 2014

'Modi Sarkar' heralds a New Bull market

An unprecedented  victory for NDA in the elections cast a  spell of  fresh euphoria in  the equity markets on May 16, which led to BSE Sensex scaling a new high of 25375 and Nifty breaking the 7500 barrier to top out at 7557 levels. Most analysts have heralded this move as the start of a multi year bull market for Indian equities. A large section of the retail investors are feeling left out or 'having missed the bus'. What lies ahead for the equity markets after a path-breaking election result?
 
The election results have thrown a clear mandate in favour of one party after a gap of 30 years, during which the nation experimented with various coalition Governments. With the election results out of the way, markets will now focus on the economic developments: like Fiscal consolidation, GDP growth, Inflation management, Currency movement coupled with signals on the progress of monsoon. The track record of the previous Govt. in the past few months can be considered satisfactory in terms of having controlled the Current account deficit (CAD) and Fiscal deficit to a large extent. However, it failed to curb inflation, much of which is due to global factors. Indian Rupee has started to appreciate and any further appreciation beyond a reasonable level of Rs.58/$ could be detrimental for the economy as it may start hurting our exporters. Inflation management will depend largely on the progress of South-west monsoon with the threat of El Nino looming large at this juncture.
 
How would the markets move in the near term, say next 5-6 months? It seems the markets have fully discounted the formation of a strong Modi-fied Govt. in the next few days. So in the immediate future markets may consolidate in a close range or may go down a little after the initial euphoria. Sporadic bursts of euphoria could be dictated by the choice of key ministers like Finance & Commerce. In my opinion the markets have made an intermediate top at 7557 on the Nifty on Friday. But as a new bull market has started, the top of the previous bull market (at 6357 Nifty) would serve as a strong support on the downside. From an earnings perspective (discounting on the basis on FY 14-15 Corporate numbers) 6600-6800 could be considered as a pivotal fair value for the Nifty. The next trigger for the markets would be the presentation of Union Budget in July 2014, as also the earnings for Q1 which would start flowing from 2nd week of July. Satisfactory progress of monsoon is a necessary pre-condition for a bull run to sustain.
 
The probability of major indices moving up much higher seems capped due to the fact that while Banking, Infrastructure, Oil & Gas sectors would outperform the market, IT, Pharma, Metals would prove to be a drag in the short term due to Rupee appreciation. It is anticipated that Nifty may move in a wide range of 6350-7550 during the next 6 months. Those individual investors who feel that they have missed the bus could wait for some correction before committing fresh funds in the market. Please avoid the temptation to enter the markets at higher end of the range, only to regret later. It may be worthwhile to consider buying stocks from IT space on declines.
 
 

Saturday, May 3, 2014

"Sell in May and go away"

There's an old saying in the  stock market: "Sell in May and go away". A  famous study   published in the American Economic Review in 2002 found that this  phenomenon does exist and  that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher in the November to April period than they were in the May to October period. Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Will this strategy work this year also, more particularly with respect to Indian stock market? Let us analyse.
 
Let me state at the very outset that the worst is over for the Indian economy. The stock market has discounted this fact, but two critical events: the outcome of Elections 2014 and the progress of monsoon will play an important part in the much awaited economic recovery in India. Let us analyse the prospects in detail.
 
Election outcome: The on-going election campaign has been a bitterly contested affair so far with the 'war of words' reducing it to 'gutter level politics' on several occasions. International agencies like Morgan Stanley, Merril Lynch & others, known for their market analysis skills have jumped in the fray to prepare research reports on 'Poll outcome'. On the basis of these reports one can build 4 different post-poll scenarios:
1. NDA getting a clear majority with 272+ seats, leading to a strong 'Modi Sarkar'
2. BJP getting over 200 and NDA 240+ seats, with Modi leading a loosely held coalition
3. BJP failing to reach the magic figure of 200, and NDA falling short of 240 odd seats, leading to a sacrifice of Modi, and installation of a BJP led Govt. headed by somebody other than Modi
4. Congress on its own getting 125+ seats, and UPA crossing 150 seats, leading to a UPA led rainbow coalition of so called secular parties.
 
While the first and fourth options look most unlikely, we may be looking at option 2 & 3. I would like to throw my weight around option 3, based on Astro-analysis. The chances of scenario 3 unfolding after May 16 is based on following indicators:
  • The planetary configuration in India indicates a fractured mandate in Election 2014
  • While BJP will emerge as the single largest party, it will end up way behind the magical number of 272.
  • The importance of UP in Indian politics is waning, and the next PM could be from Central India (may be Madhya Pradesh)
  • Regional satraps from states on South-eastern coastal belt will play an important role in Govt. formation (Jayalalitha from TN, Jaganmohan Reddy from Seemandhra, Navin Patnaik from Orrisa & Mamta Banerjee from WB: one or more of these leaders will play a crucial role in Govt. formation).
Progress of Monsoon: There will be a lot of concern about the occurrence of El Nino, leading to a delay in advancement of monsoon in May-June 2014. There could be a possibility of drought in few states raising alarm bells over decline in kharif output. These fears will propel the continuation of higher inflation levels.

From the above analysis I am tempted to conclude that Indian stock market is likely to enter a temporary bear phase which is likely to last at least 36 days from 17th May 2014, lasting up to 21st June 2014. There is likely to be a delay in Govt. formation and the new Govt. may settle down only after June 21. At the same time the major adverse impact of El Nino will play out in May-June and is likely to subside by end of June. So investors are advised to "Sell in May and go away". But I still continue to maintain that FY 2014-15 promises to be an excellent year for equity investment and the equity markets are likely to resume their secular uptrend from August 2014. Position yourself to take advantage of the opportunity.

Disclaimer: I do not claim to be an Astrologer, the above analysis is based on my limited understanding of the subject, with a view to help investors take informed decisions on their investments.