Tamilnadu Investors Association – Investors Digest.

by Vivek Karwa, CFP^CM

110114: Stock markets have started the New Year on a rough patch. Various news factors have been haunting the sentiments of the investors. FII’s have pulled out quite a significant sum of money since late December till date. The confidence among the domestic investors, both retail and institutional also has shaken a bit.

Indian market has been commanding premium compared with many other markets due to the growth story which India presents to the world. Not only Indian companies are expanding, lots of foreign companies are ready to set up show in our country due to the business prospects visible here. India remains to be largely a domestic consumption story since as a country we are not dependent on exports and growth and health of other countries. We as a country have enough population to consume a major chunk of what we produce.

Any emerging economy like ours is bound to have inflation a bit on the higher side but the latest figures of more than 18% have shaken a lot. Inflation is the biggest enemy of growth and this has to be tackled on war footing by the government. At what ever rate we grow, high inflation does not improve the standard of living of people since the rising prices do not allow them to create any wealth and this high rate of inflation nullifies what ever growth we have been achieving.

A higher inflation does not allow people below the poverty line to rise above since though their earnings may have gone up everything is spent of buying the essential products. A higher inflation does not even let government bring down the fiscal deficit and that is absolutely what we are witnessing now and the investors are in a tizzy of the deficit which may miss the budget target. Rising fiscal deficit and the rising inflation have made the investors shun the markets as of now.

Not much has happened yet and clear policy decisions will help the government tame the food inflation which in particular is hurting all. Consumers can at some point of time do away with other products but food is something which has to be spent for at any cost.

The general expectation in the market is that the reserve bank may increase rates by 50 to 75 basis points. The recent IIP number of 2.7% shows that the growth is not that robust and a rate hike may slow down it a more. Hence we feel RBI may take a mid path by which it can control inflation a bit without hurting the real growth. World Bank has predicted that India may outpace China in GDP growth in the year 2012 itself which is a great positive news for domestic investors to take advantage of the current correction and start investing atleast in tranches so that they do not miss the next upmove.

Sensex had posted an EPS of around Rs.838/- in the year 2010. We assume that India may continue to command premium and India may continue to trade at a PE of 23. Assuming a growth of 15% in Sensex EPS at a PE of around 23 the index should trade around 22200 in the first half of 2011 and considering an aggressive growth of 20% we may trade and end the year 2011 around 23100. During the last quarter of 2011 we may start factoring in earnings of 2012 and at a PE of 20 we may trade around 24000. Hence fundamentally we can presume that ending 2011 in a range of 23100 – 24000 is a possibility provided we do not witness a political instability.

Technically we feel a range of 23200 – 24600 can be possible in 2011. The first support for the index comes in the range of 18800 – 18600 and if these levels are not held on by the market then the second support is in the range of 17300 – 17000.

By the targets mentioned above it is clear that we are not over optimistic and aggressive on the markets and hence buying the right stocks would be difficult task in this scenario. One has to be very very choosy.

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.

*Vivek Karwa is a Management Committee Member of TIA but the views mentioned are of his own and not necessarily that of TIA.