Some Relief: Brings Reason to Smile & Opportunity for All

After a long time there is some relief and investors have a reason to smile as the market moved upwards for four continuous trading sessions in the last week. On Tuesday (March 25, 2008) the market even witnessed 900 point plus gains-its second highest single day upward movement-largely because of the positive US market triggers. Significantly the recent rally has been more broad-based where even mid-caps and small-caps moved up. In addition, on Wednesday (March 26, 2008) while the Sensex was down by 130 points, the broader market was quite resilient. BSE-500, CNX Mid-cap, Nifty Junior and BSE Small-cap indices closed either flat or even higher. Do these developments indicate that the worst is over for the market? Are we being too optimistic to call it the end of the bear run?

Many of the reasons that caused indices to plunge are yet to show up in actual numbers. Barring the sub-prime losses that continue to singe banks and securities firms, other concerns have not yet demonstrated its impact in actual numbers. The US slowdown is still in the works and corporate earning outlook in the US continues to be mixed.

What are the other concerns? Rise in global commodities' price and inflation are becoming bigger worries worldwide. The price rise in commodities is putting pressure on inflation and at the same time, reduction in interest rates is very essential for consistent growth.

Even India's WPI-based inflation is now nearing six per cent and things are going to worsen as the Sixth Pay Commission may result in higher inflationary pressures. Therefore, this rules out any reduction in interest rates, which is crucial to maintain high growth rates. Even finance minister P Chidambaram concurs the fact that global slowdown may impact the growth of Indian economy. On the domestic front, advance tax collections have been strong even while industrial production seems to have slowed down and some brokerages have lowered the GDP growth estimates for the next fiscal to less than eight percent. So this does not show a clear picture at least in the near-term. But as stock markets are always ahead of the real economy, probably much of the bad news is already priced in.

But everything is not grim for the market and the economy. There has been a great deal of FII buying in the last three days. FIIs have been net buyers to the tune of Rs 2206.60 crore. Although earlier FIIs were net sellers in the Indian market, it was not because the high valuations but it was because of the urgent need for liquidity to bail out their parent companies suffering from the sub-prime losses in the US. A section of the analyst community also believes that as the price of crude has gone up substantially even the petro-dollar will provide the desired liquidity to global financial markets.

Even mutual funds have considerable cash and this could be around 7-8 per cent of their total asset under management. Along with this, expect large inflows in tax saving mutual fund schemes and insurance related savings by the end of March as the financial year is coming to an end. All these funds are expected to come into the market and could provide considerable liquidity and help the Indian market to surge.

As usual predicting market is difficult and it is tough to pin-point the level at which the market will find its bottom. True, we can predict a range. It maybe reasonable to assume markets have substantially discounted the ill effects of the US financial meltdown. Still the near-term direction of the market depends on global cues and events. I believe that the market unlikely to go below the 14000 level but any bad news on global and domestic funds will further push the market to the 11500 level.

At the current level investors can look at investing systematically with an investment time frame of about two to three years. Given the extent of sell off, the market may take some time to consolidate, unlike in the earlier pull backs where the recovery was quick.

On the corporate front, Tata Group has again signed a land-mark deal. Group Company Tata Motors has entered into a MoU with Ford to purchase iconic brands Jaguar and Land Rover (JLR) for $2.3 billion. The response to the deal has been mixed from the analyst community. While some of them have put a buy recommendation on Tata Motors, some others find the deal negative for Tata Motors at a first glance. Whatever may be the impact in the near-term; the deal is surely going to benefit the company in the long-term.

Regarding the market those who are already invested, remain invested at the current level. Those who have not participated in the market or are under-invested; this is the time to participate in a systematic manner, thereby eliminating the need to time the market. For the short-term traders I still advise them to take every rally as a selling opportunity.

Source: Flash News Vol 23-No.48