Few Words on Market…

Tamilnadu Investors’ Association – Investors Digest

by Vivek Karwa, CFPCM ,Investment Strategist & Retirement Planner

110716: Market has tested the mentioned support levels second time in a row in the past two months. Last month we had re-iterated that the support for Sensex still lies in the area 17500 – 17280 and in case of a decisive close below the mentioned support level, the next tentative support would come in the area 15950 – 15650. The Sensex in panic hit a low of 17314 on 20/6/2011 and recovered immediately on value buying. Mentioning the exact level would be possible only once the first level is taken off and market closes below 17280 for atleast two to three days.

The panic on 20/6/2011 was on account of looming debt fears of Europe coupled with our own IIP data which was revised downwards. Market though prepared for a slow down cannot digest a larger than expected slowdown in the manufacturing activity. The RBI action of continuous rate hikes is finally showing its effect on the growth but the inflation which is the main concern remains as it is! We don’t think the intention is to slowdown economic growth hence the government and the central bank have to decide and stop here and resist from hiking rates any more, instead draw up policy decisions which can help bring down the prices.

The government is in fire fighting mode and hence it does not look like that there would be any consensus on the GST before the end of this financial year and hence cannot expect this major reform to pass. The direct tax code is also expected to be in force from 1st April, 2012, but again the final draft has to be discussed in the parliament and then passed by both houses before it could become a law. The snail speed at which things are moving right now, it does not seem that the DTC indeed will be a law from the next financial year. The chances are just fifty-fifty.

The FII’s finally returned to the Indian markets and put in almost 6000 crs in June alone. We may like it or not, Indian market is dependent on the foreign money and hence until we see phenomenal increase in the retail participation or sustained inflow of the FII money we cannot expect our market to outperform. The government policies have to be transparent and decisions have to be swift to bring in the confidence so that foreign money gets invested for long term.

Apart from the known concerns the FII’s also fear that there could be EPS de-rating coming in for the Sensex and that could lead to revision in the targets. Till now this fear has not actually materialized and we almost expect an EPS of 1150 – 1200 for Sensex in the year 2012 and thus helping the index take support at 17500 everytime it reaches there.

The results have started coming in and till now there is no major fear of earnings slowing down at a pace faster than expected, even the IT majors have surprised the markets by posting higher than expected results though the business conditions in EU and US are not very favourable. But one thing is certain that the market can’t handle any more rate hikes.

Assuming that the rate cycle has peeked here or is just about to peak now, investing in sectors like Banking, Automobile and even FMCG may help investors generate better alpha. Banking and Automobile valuations look attractive and hence may outperform if the body language of RBI is favourable this month end. Valuations of FMCG are stretched hence it may continue as market performer.

One can avoid infrastructure sector even though the valuations look very attractive and though the sector will see lot of investments in next few years. The long term prospects of the Indian market look very attractive and hence investors should take benefit of every dip. If the Europe crisis get’s bigger then there could be very volatile swings either way and thus be prepared. Warren Buffet says “Be Fearful when everyone is Greedy and be Greedy when Everyone is Fearful"

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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