TIA Article – 100118

Few Words on Market – TIA – Tamilnadu Investors Association

100118: The industrial output grew at its fastest pace in two years. The Index surged by 11.7% in Nov’09 as against 2.5% in the same period previous year. Manufactured goods having 80% weightage in the index, grew by 12.7% as against 2.7%. We are seeing markets trade in a range and the 17700 – 18000 levels which we have been mentioning remains to be broken on the upside for a fresh rally upwards. One of the big reasons for a subdued trading is a general expectation of a CRR hike by RBI when it meets on 29/1/10. The expectations have become a worry for the markets particularly after a recent rate hike in China.

The worry is on account of the reversal of trend in the monetary policies of the central bank and a 25 to 50 basis point increase in the rates infact may not dampen the mood since this hike is already factored in the sentiments. A status quo may bring in a fresh buying which may take us above the crucial resistance mentioned earlier.

Inflation remains a cause for concern which is ruling high mainly on account of food price inflation. For instance Sugar is selling at Rs.45/kg and we do not think the prices of sugar can be controlled by a rate hike! Increasing CRR may not curtail food prices, we have already seen this phenomenon in 2007 hence the central bankers will have to deliberate a lot before such a decision can be taken. Its time the government looks on the supply side issues which are the main reasons for the rampant price increases. One more problem is the prices behave in two steps forward and one step backwards manner, not correcting in the same manner they move up.

The quarterly results announced till date are satisfactory. The net profit increases shown are due to the lower base effects which may get tampered down by June quarter. Increase in the sales numbers and the revenue growth by the companies point towards real growth. If this can be sustained then we may see an upgrade in the Sensex EPS this month end or may be by next quarter, resulting in an increase in the markets also.

We are again seeing a reversal in the movements of the Dollar, continuation of it weakening will result in more carry trade advantages for FIIs, hence we may see more inflows into emerging markets and India would also get a substantial share of the money. Though the markets have been moving continuously upwards past few months, the craze which we saw in 2007 is totally missing this time. Many investors have been booking profits and are sitting on cash to buy on dips. This cautious approach may reduce the volatility in case we have to correct.

Though overall the scenario on ground looks good investors have to be very careful and vigil at this point of time, atleast those who are fully invested. The divestment program of the government is going to bring in large supply of paper in the market by way of IPOs and FPOs. Some issues may hit the market even before the budget and the budget may draw up a plan for aggressive selling of government stakes in many companies.

The budget may not be an event to expect much out of this time. No major changes may be announced as implementation of The Direct Tax Code is on cards now. The same may get delayed, as it usually happens to many legislations, yet the focus on the budget may not be as usual.

We are bullish on PSU banks in particular, they have corrected little in the recent past on rate hike fears but investors with longer term horizon should accumulate. Investors are advised against buying highly valued PSU stocks at this point of time. Many stocks have run past over their justified valuations only on the divestment news, and may correct after such stake sales gets completed. Sensex will witness good support at 16550 and 15350 on the lower levels. If it is able to sustain above 17700 – 18000 for few days then we may attempt targeting 19300 to 20200 by end of this year.

Disclosure:- It is safe to assume that the author may have interest in the sectors recommended in this news letter. Seeking personal advice from your Financial Advisor is recommended before acting on any of the substance given herein. The numbers, figures, etc., presented may have been taken from various sources.

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