Markets to trade with a downward bias in short term

The May series of derivative contracts ended on a lack-lustre mode. Both the Nifty and the Sensex have been trading with a downward bias after rounds of extreme volatility. The June series has opened on a positive note, buoyed by better than expected GDP numbers and the hope of a 25 bips rate cut by the RBI policy announcement on 2nd June. However, this positive bias should be treated as a short term bounce and may be used to lighten commitment of funds to equity markets. The markets have already factored in the rate cut, and we might see the markets drifting lower in the course of next 2-3 months. The major worrying factors for the markets are listed below:

• Corporate results: Most of the corporate results for Q4 of FY 2014-15 have been disappointing, and have not kept pace with the expectations of the analysts. This makes us to believe that a real ground level economic recovery is still a good 2-3 quarters away. Most company balance sheets have been artificially boosted by restructuring of doubtful loans, as RBI is seen tightening the restructuring norms from this fiscal. 'Make in India' does not seem to get off the ground despite many noises by the Govt. Companies have been reluctant to add new capacities immediately, fearing a demand slowdown.
• Progress of Monsoon: Forecasts by Met department regarding a below par South-West monsoon have added to the worries of the Govt. as rural demand is already showing signs of slackness. Global scientists have a strong belief that the El-Nino effect will have a negative impact on agricultural productivity in Asia. Govt. will have to lend support to the farming community by raising support prices of essential crops leading to build up of inflationary pressures once again. RBI may press the pause button on further rate cuts after the most anticipated rate cut on 2nd June.
• Rupee Depreciation: Indian Rupee, which traded with a positive bias against most currencies, has considerably drifted lower in the past 2 months and is now trading at Rs.64/ dollar. It is likely to drift lower toward the 67-68 mark in the short term. The instability of Rupee in the recent past has been the major cause of worry for Foreign investors, and they are unlikely to return to invest in Indian markets unless they perceive stability in the value of the Rupee. Although, Rupee depreciation will be a positive for exporters, it may lead to further exodus of funds by FIIs. IT and other export oriented sectors are likely to do well in such a scenario.

The above factors are likely to have a negative impact on the markets in the short term, leading to a 5-10% correction from these levels. This correction will be a good time to accumulate quality stocks from infrastructure, banking and automobile sectors for a long term perspective, provided the Govt. is able to maintain its tempo on fiscal consolidation and demand creation through development.

'Clock Turns Full Circle': Brace for a deeper correction

As we approach the first anniversary of 'Modi Sarkar', the clock seems to have turned a full circle. Our markets gave a resounding welcome to the new Govt. after the declaration of 'Election 2014' results Our markets scaled the levels of 7500 on the Nifty on 16th May 2014, on the back of a clear majority for a single party in the Lok Sabha after a gap of many years, ending an era of coalition governments at the Centre. There has been a lot of noise by the Govt. but it has hardly translated into results, as measured by the quarterly results of Corporate India, the latest March quarter results are a poor reflection on the economic performance despite the hard talk by the Govt.

 

The good luck of the Govt. in the shape of drastic fall in crude oil prices has been offset by the unseasonal rains, putting pressure on the inflation numbers once again. After collecting a bounty through Coal auctions & Telecom spectrum sale, the Govt. is finding itself in a corner, unable to push the key measures of GST and Land acquisition bill. It is also seen dragging its feet in respect of key tax regulation in respect of FII's. In such a scenario there is no hope for the economy in terms of stimulation of rural demand, which has been the main driver of our GDP growth in the past. On the back of new series of GDP indices we may see growth of GDP in the region of 7.5% for FY 2015-16, it's impact on Corporate earnings is seen as muted.

 

The global scenario is also not favourable for India, as Euro zone worries are bound to surface again. The Rupee has started depreciating against the US Dollar, and it is likely to slip to the levels of Rs.67-68/ US Dollar in the next quarter. Although it augers well for the export sector, particularly Software exports, its impact would be severe in respect of controlling inflation. 'Make in India' campaign has been a non-starter so far as is evident from the IIP numbers and the lack-lustre credit off take from the banking sector. Erratic South-west monsoon predictions by IMD also pose a threat to the economic revival.

 

Equity markets have started giving credence to the ground reality, with the Nifty closing below the 8200 mark on expiry of April series. Nifty has already corrected by 10% from its peak level of 9119 attained on 4th March 2015. Our markets have been one of the worst performing markets in the first 4 months of 2015. Valuations may have started looking attractive to some analysts but the market sentiment has taken a severe beating. A deeper correction is looming large over the equity markets and they seem heading towards 7800 levels on Nifty. In a worst case scenario Nifty may drift towards the 7500-7600 range in the May series, these are the levels from where the markets started their ascent on 16th May 2014. The old saying 'Sell in May and go away' is likely to play out this year. Investors are advised to keep their cash intact in order to make a killing in the markets once they correct to the levels mentioned above. At these levels the risk-reward ratio would turn positive from the earnings perspective, that would enable you to make handsome profits from the market over the next 2-3 years.

Honeymoon Period of Modi Govt. over: Markets acknowledge

As Team India bowed out of ICC World Cup 2015, our equity markets retracted by around 700 points on the Sensex on the day of March expiry (Nifty closing at 8342), giving a strong indication that the honeymoon period of Modi Govt. is over. Finally, reality has been acknowledged by the market that nothing much has changed for the economy at the ground level despite all the good intentions of the Modi govt. This reaction of the markets heralds the beginning of a short to medium term downtrend, which can take the markets all the way down to 7800-7900 levels on the Nifty in the next few trading sessions. The front line indices are likely to stagnate in the 7800-8500 range for the short term, as most of these stocks are now quoting at unsustainable PE multiples, with no visibility in earnings upgrade in the near term. However, select mid-cap stocks would continue to out-perform the broader markets, based on their FY 2014-15 numbers which would start unfolding from the 2nd week of April 2015.

 

I can safely stick my neck out and state that we have scaled the highs for 2015, when the Sensex topped 30000 and the Nifty 9100 on 4th April 2015, as a follow-up to the announcement of surprise rate cut by RBI. The markets are likely to consolidate for at least 2-3 quarters before making the next decisive up move. Investors are advised to commit fresh funds with a minimum horizon of 1-2 years when the indices move towards the lower end of the range described above. Money is more likely to be made in select Mid-cap stocks based on their performance in FY 2014-15. Those looking for fixed returns are advised to lock in funds for long term, as the Bank Fixed deposit rates are likely to fall drastically over the next 1-2 years. Don't be surprised to see deposit rates falling to as low as 5-6% per annum during this period.

 

The focus would now shift on the policy implementation of key decisions at home, and International scenario governed by geo-political factors in the US, Euro Zone & Middle-East. Markets would also closely watch the inflation numbers and the consequent policy action by RBI on rate cuts. The probability of aggressive rate cuts is most likely to materialise in the 2nd half of Fiscal 2015-16, depending upon the satisfactory progress of monsoon across the country. The impact of lower interest rates would start to reflect in Corporate balance sheets from Dec.'15 quarter, which would be the time when markets would re-rate the various companies, and trigger the next uptrend. Till then, market participants should prepare to negotiate the middle overs patiently without getting too excited, which could be very boring at times. But as they say in market parlance: 'Patience is the Key' to reap profits in the markets.

 

 

Budget Blues: What did the Markets get?

Our equity markets engaged in intense yo-yoing on the budget day but managed to close marginally in the green in the end. Now that the event risk associated with the budget is over, our markets can go back to business as usual. Let us, at the outset, analyse the impact of the Union Budget 2015 on the market sentiment.

 

NDA Government's first full fledged budget has been hailed as a path breaking budget by a majority of market pundits for it's forward looking statements. The budget appears to be an excellent policy document for long term growth, but at the same time it has failed to clearly spell out the means to achieve the end result. The budget has tried to reverse the composition of spending that had become adverse in recent years as Capex spending as a percentage of GDP fell from 3% to 1% on the one hand and the subsidies more than doubled. This budget has stepped up the allocation by 0.5% of GDP and substantial reduction in subsidies, aided to a large extent by falling crude oil prices. The spending has been largely focused on roads and railways where the multiplier effect may be easily visible. Introduction of new fiscal federalism will shift the focus of greater spending responsibilities to the states.

 

Some other important policy decisions incorporated in this budget are:

• Creation of a comprehensive bankruptcy code
• Lowering corporate tax rates to 25% over next 4 years and doing away with various exemptions
• Putting off implementation of GAAR for 2 years
• Creating liquidity out of individual gold holdings through 'Gold Bonds'
• Fixing 1st April 2016 for implementation of GST. Rationalisation of Excise duty and service tax are steps in this direction
• Doing away with obnoxious 'Wealth tax' where the cost of administration was very high as compared to its benefits to the govt.
• Work towards creating a universal social security system for the common man
• FMC to be merged with SEBI, for orderly development of various markets

 

However, the budget has disappointed on the fiscal consolidation front, despite huge saving on oil sector subsidies. Fiscal deficit for the year has been pegged at 3.9% of GDP. To achieve a 8% GDP growth in FY 16 we need a substantial growth in demand side components. There has been no tangible measures to augment household disposable incomes. The demand side push has to come from the Central Govt. supported by various State Govt's.

 

Our stock markets have been steadily going up in the hope of some 'Big Bang' announcements in the budget (Nifty has rallied about 8% since 1st January 2015). Although the budget does not contain any nasty surprises, it has failed to meet the market expectations in respect of reasonable reduction in Fiscal deficit, Cuts in individual taxation, Steps to boost housing sector, Capitalisation of PSU banks etc. The markets would also view the progress of the Govt. in the Budget session, in its ability to get various important bills passed amidst stiff opposition. The 3rd quarter results have been below expectations, and the chances of a rate cut have diminished further due to the inflationary ramifications of higher excise duty and service tax. Under these circumstances the markets would take cognisance of the ground realities sooner than later, after the initial euphoria subsides. Although the long term trend continues to be up, markets are in for a short term correction which could take the markets down by at least 8-10%, before the next round of rate cuts are announced by RBI.

Indian equity markets conquer Mt. Everest

January 2015 series has proved to be a record breaking success story for the Indian equity market, when both Sensex and Nifty scaled Mt. Everest, the highest peak on earth. For statistical purpose the height of Mt. Everest has been recorded as 29029 feet (corresponding to 8848 meters) above Mean Sea Level (MSL). At the end of January series, Sensex and Nifty closed at records highs of 29682 and 8952 respectively, after conquering Mt. Everest. So, henceforth, our markets have leapfrogged into an uncharted territory where only sky is the limit. Let me admit, many of us including myself, never anticipated the ascent to Mt. Everest to be so fast and effortless as it turned out to be.

 

There are a few coincidences between the ascent to Mt. Everest and the ascent of our equity markets. The two base camps for climbers attempting to climb Mt. Everest are established at 17600 feet (5365 meters) in Nepal known as South base camp, and 16900 feet (5150 meters) in Tibet known as North base camp. Signs of animal life beyond 21000 feet (6300 meters) are very rare. Ascent above 26000 feet (7800 meters) is often referred to as 'Fatal Zone' as many climbers have perished at this height due to blizzards. We may note that Indian equity markets came close to levels of 21000 on Sensex (6300 on Nifty) at the fag end of the famous bull run that ended abruptly in January 2008. From these levels our markets slipped time and again to the levels of 16900-17600 on Sensex (5100-5300 on Nifty), making this as a strong base for the next bull run. We broke past the 'danger zone' of 26000 on Sensex (7800 on Nifty) after the installation of the new Govt. at the centre in May 2014. Since then it has been a relentless quest to conquer Mt. Everest, chanting the 'Modi Mantra', which our markets have successfully achieved in January 2015. Where do we go from here?

 

It has been a vertical climb for our markets from 26000 on Sensex (7800 on Nifty), so these levels now become the new base camp in the current bull run. Life at the top of Mt. Everest is not going to be easy considering the hostile environment (a.k.a. global cues). But the trend of easy global liquidity may help sustain these levels till the presentation of a most anticipated Union Budget by the Modi govt. on 28th February 2015. RBI Governor Rajan may also lend a helping hand to the bulls by announcing another rate-cut. A word of caution: We may not forget that currently our markets have run ahead of time and a descent from these levels is inevitable when the euphoria subsides. Q3 results that have been declared so far do not present a very rosy scenario. The valuations of most front line companies are fairly high in comparison to their historic averages. Notwithstanding the fact that we are in the midst of a great bull run, we must not perch our aspirations too high to expose our portfolio to the risk of blizzards.

2014 was the year of Equity market: What to expect in 2015!

Equity market investment has given excellent returns for 2014: Both Nifty and the Sensex gave returns of 32% in 2014 (Nifty moved from 6300 levels to around 8300 levels at the close of the year after scaling a high of 8600. The broader markets represented by Mid-cap and Small-cap indices have given even better returns between 52-55% during the year. Other asset classes viz. Gold and Real estate have either stagnated or have given negative returns during 2014. It has clearly been a year of the Bull in the equity markets. Small investors have returned to the equity markets as reflected in the surge in AUMs of Mutual Funds.

 

Most equity market participants are upbeat about the prospects of the equity markets during 2015, but concerns remains on the economic front. So far the markets have been riding on the 'Modi euphoria' but things have not changed much on the ground level. The sluggish GDP growth coupled with contraction in manufacturing during October 2014 is ringing alarm bells for the economy. GDP growth is suspected to slip further during the 3rd & 4th quarters of fiscal 2014-15, as agricultural growth slows. GDP growth in Q1 & Q2 has large contributions from Agriculture and Service sectors which may not sustain going forward. But the main concern comes from the manufacturing sector, the capital goods sector continues to contract reflecting sustained weakness in investment demand. A tepid growth in bank credit is also a major cause for concern. On the revenue front the Govt. struggles with its finances with a tax collection shortfall of Rs 1.05cr. from budget estimation. this may lead to further slashing of expenditure from the Govt. leading to further slowdown in the economy. This is despite the windfall saving the govt. has made with the unexpected fall in crude oil prices. There is a danger of GDP slipping to 5% or below during Q3. A depreciating Indian rupee also poses a threat to sustained FII inflows. Global concerns of a slowdown in Europe remain, with a few economies still tottering on the brink of default. We can expect a few negative surprises on this front too.

 

All the above factors combined together pose a serious threat to the equity indices in the short term. Although the long term Bull run may seem intact investors should not look for fireworks in the equity market in the first six months of the New year 2015. The coming year may not be able to match the returns investors garnered from equity investment in 2014. Investors are advised to be cautious while making new investments at higher levels as the equity markets are likely to stagnate in the broader range of 7800-8500 on the Nifty during the first half of 2015. We can expect a turnaround in the second half if the Govt. is able to revive the investment cycle with a support from the opposition on the political front. However, this seems a tall order for now. My advise would be to invest judiciously in 2015, using the declines in markets for infusion of fresh funds. Wishing all investors 'Happy investing' in 2015.

Economic Data a dampner: Modi magic continues to rule the markets!

Despite dismal economic data (GDP figures for 2nd Quarter) released on the weekend, markets are in no mood to relent their run-away party that started with the installation of Modi led BJP Govt. at the centre in May 2014. The bull run has still some steam left and may continue through December series, before FII's proceed on their Christmas break. The Modi magic continues to rule the market currently, and a 25 basis point rate cut in Monetary policy to be announced on 2nd December may lend an extended lease of life to the markets.

 

Coming to the ground reality on economic front, there has been little respite from the stuttering economic growth. India’s economic growth slowed in the fiscal second quarter (Q2) as industrial output stagnated and investment demand remained tepid. Gross domestic product (GDP), the broadest measure of goods and services produced across the economy, grew 5.3% in the three months ended 30 September, against 5.7% in the previous three months, which was the highest in ten quarters. Manufacturing sector growth has grown by a dismal 0.1% during the quarter. At the same time the fiscal deficit for the first 7 months of the current fiscal has already reached 89.6% of the annual projection. Thus the hands of the Govt. are tied in its efforts to spur demand. Inflation as measured by CPI has grown at a lower rate of 5.5% in October 2014. Fortunately for Modi, crash in international crude-oil prices has played a major role in reduction in the rate of growth of CPI.

 

Modi led BJP Govt. has made the right noises so far with Modi's international diplomacy: winning votes for him in India and likes for him throughout the globe. But, with six months of honey moon period having come to an end, people are now looking forward to some big bang reform announcements by the Govt., which could revive the fortunes of manufacturing sector in India. The markets would closely watch the winter session of Parliament to seek answers to these questions. The markets would, in the short term react to the dichotomy between rhetoric and the actual figures reflected through the economic data. The liquidity driven rally may take a breather in January as the liquidity is sucked out through large divestment of PSU shares in the last quarter of this fiscal year. However, the likelihood of continuing depressed crude prices could play a major role in revival of the Indian economy. For the present, our markets seem to have extended their run ahead of fundamentals and a reasonable correction cannot be ruled out, once the FII's take a break from the markets.