Tuesday, May 26, 2009
Two queries are posted in the 'Comments' section regarding the Trend of Indian equity markets and its prospects from here, now that there is a major positive in terms of political stability and likely reform movements expected to be announced in the upcoming Union Budget. In this posting, i will try to address both these queries which has a common base and content as my reply.
First query was from Mohit which he had posted on May 16, 2009, the day when poll results were announced. I had purposely kept his query pending as the trend was unclear for next few days. And that it would have been more prudent for me to let the high volatility, which would follow after such a sharp unilateral move, to subside and find its feat in next one week time. So, now I will take up his query in detail in this posting. His query is as follows:
What do you think would be new developments after good election results do you think long term investors should invest now or wait for some time. Please write on new entry prices for blue chips and core portfolio stocks.
Do you think we have missed the bus and the new highs would me made in markets and we would not see previous lows or even 10k levels in coming times
There is somewhat a similar type of query but a little more detailed in nature from Santy in the 'Comments' section of my previous post. The query revolves around scepticism about current index valuations and as to what could be the right time for investors to jump into markets from next few years of time horizon. His detailed query is as follows:
Unlike most people predicted, that the market will lose 10-15% post the election , it has surprised everyone and is now trading in 14k zone. Look like unless something major like Satyam happens we don't see the market going down much from here.I have couple of questions in this regard?
1) Do u think it is right time for investors to jump in and start accumulating keeping in mind a 3-4 year horizon?
2) Don't you feel the valuations are too high now?
3) If we do have to start accumulating , then till when? Till Sensex reaches 17-18k mark and then put a hold ?One just gets the feeling that we have missed the bottom and no way market is going to go back to the 8-10 k range. So why wait ?Please let me know your thoughts.
You just have to visit a few steps back to the last quarter of Calendar year 2008 when pessimism was at it peak and the road to recovery seemed as far as at least 2-3 years of time frame. The bear phase triggered by a deep recession in the Western countries and a sharp slowdown in the next Growth engine of the world - the emerging markets, seemed vicious and entangling the world into more and more signs of trouble.
However, gradually, as the pessimism witnessed its catastrophic low during the October 2008, global markets were back on its way for some consolidation at the higher levels. Some specific parts and industries of the Global economy witnessed a mild recovery in the early part of the Calendar year 2009 which triggered a sharp rally in the global financial markets.
Indian equity markets swung along with positive cues in the initial part of the rally. Gradually, it seemed that Indian markets lagged a bit behind as compared to other emerging markets. However, the day of May 16, 2009, proved to be a game changer for the Indian markets in terms of fundamental shift for the Indian economy.
The Congress-led UPA were elected as a winner by the Indian public. UPA emerged as a virtual majority for the shot at forming new Central Government, this time without the support of the Left party which proved a major hump in the UPA's stint during the previous 5 year term. Indian benchmark Indices BSE Sensex rose2000 points on May 18, 2009. It was the sharpest rally that the any markets of the world had ever witnessed in a single trading session. The Sensex jumped from 12000 levels to as high as 14000 in a single day.
Is there a Fundamental Shift?
Foremost question that comes to the mind of any investors or traders is whether there is any fundamental shift on the ground level to support this kind of euphoria?
The answer could be nothing has changed in one day except the political stability for next five years. Fortunately, that in itself is a biggest positive phenomenon to happen for the Indian economy. A stable government on the centre with a free hand towards pushing Reforms and Disinvestment process would prove to be a major booster to the economy in the years to come.
There is nothing on the ground that the economy can boast of for a change in fundamentals right away. But, markets don't work on present scenario. Markets are way ahead of the ground reality & it speculates right into the future. The current euphoria clearly factors in that the new government will kick-off new reforms movements & likely disinvestment plans in major PSU companies to raise funds and act towards tightening high fiscal deficit in next few years.
The dream of a stable government for next 5 years in itself could be a big positive for markets. Now, that this prospect of stability is coupled with Reform movements, Disinvestment plans & further incremental Stimulus package for the economy, it is but obvious that markets would give a big thumbs-up to all recent developments.
Will FM Disappoint?
The role of Finance Ministry assumes great importance in the eyes of equity markets. Pranab Mukherjee has been delegated the portfolio of Finance Minister. It is said that India, indeed, needed a FM with political background rather than a technocrat for this elite post.
This is from the perspective of new reforms and other initiatives which could be kicked-off more smoothly under a leadership of an able minister. The Union Budget is expected to be out around July end and markets are having a close eye on sectoral reforms & social reforms for the stability of the economy. The FM is also expected to raise money from crucial funding exercises like disinvestment in major PSU companyies. The proportion of disinvestment could be range from as little as 5-10% in profit making PSU's and as best case scenario it could be as high so that government reduces its stakes in these companies to as little a majority 51% stake.
Even a small 5-10% stake sale would garner a big substantial sum for the government which could be used to develop infrastructure projects, filling fiscal deficit, spending for social sectors like education, rural unemployment, rural health programme, etc.
Where are Market Headed Next?
In the medium term horizon, markets will remain range bound. Sensex has graduated to 14000 levels from 12000 levels with a big cause. It would be naive to believe that we would test those 12000 levels again any time soon. Most of the large-cap stocks are no more as cheap when compared to their Earnings performance. This will further bind the market to remain in a tight range if it wants to sustain in the Nifty 4000-4500 range.
That is the reason as to why mid-caps witnessed a sharp rally in last one week. They were laggards to a big extent when compared to valuations in large-cap stocks. Most of the mid-caps have already rallied 70-90% in a week’s time & some have, in fact, rallied more than whooping 100% by margin.
Markets are currently gasping for breath in the form of News & Events to sustain at current higher levels. The next news event is still at least a month away in the form of Union Budget or Corporate Results which ever is earlier. Until then, markets can be expected to hover from Nifty 4000 to 4500 levels.
Medium-term Downside Risk:
Nifty consolidated in the range of 2500-3150 for almost 5 months. Later it witnessed a break-out raising hopes of a new range altogether which could span from 3150-3850 broad range. But, poll results proved to be a complete surprise. Markets had clearly not factored in this case scenario of a clear majority for any specific Political Alliance.
The win of Congress-led UPA alliance came as a surprise to the markets which got reflected in ‘Panic Buying’ by the market participants raising market bar by almost 20% in a single session. The new range has come on the anvil at Nifty 3800-4500 range.
With this, the risk of re-test of previous 52 week lows of Nifty 2500 could be ruled out once and for all. Now, speaking about worst case scenario (whatever it's triggers be), would bring downside risk at Nifty 3150 which is an extremely strong support zone. The all-important resistance at Nifty 3150 for the old 5 month trading range of Nifty 2500-3150; would now prove as a very strong support from here on. The corresponding figures for the benchmark index Sensex would be rougly around 10500 levels.
Is Re-test of Nifty 3150 eminent?
A re-test of Nifty 3150 may not necessarily be eminent. But, a re-test of Nifty 3150 would put Indian indices on a very strong footing as that would amount to big consolidation commencement a start of a new bull wave. But, a re-test of Nifty 3150 won’t be so easy to come by now that we’ve a very stable government at the centre. Possibly only the negative global cues could act as a trigger if we were to re-tests Nifty 3150 over medium-term horizon.
However, there are other crucial supports on the downside from current levels, the re-test of which could be more eminent over a period of time than perhaps Nifty 3150 levels which could be more so a target for the worst case scenario. There are crucial supports at Nifty 4000 and 3500 which will provide a strong guard against any further downside risks.
Are Valuations Too Expensive Now?
Valuations in many large-caps are, of course, expensive. In fact, valuations of some heavyweight large-caps like RIL, ICICI and HDFC to name a few, are way ahead of their current earnings performance. Even particular large-cap FMCG stocks looks a bit over-valued as they have not under-performed during the pessimistic times.
Oil & Gas major Reliance Industries currently trades at a P/E multiple of 21 times at the prevailing stock price of around Rs.2200/- levels. Even financial conglomerate ICICI Bank trades at a steep premium valuation of 22 P/E multiple. Housing loan provide HDFC Ltd. quotes at a steep premium of 27 in terms of P/E multiples.
However, there are still some large-cap stocks which could provide some bit of value even from current levels especially from PSU Banking sector. Though, even they have appreciated quite a bit in last couple of months, they atleast don’t look excessively expensive as compared to their private counterparts.
Is it Right Time to Buy for Long-term?
Have you missed the bus? Don’t fret…
When speaking from investment for 3-4 years perspective, I feel that valuations of most of the large-caps are a bit over-valued at this point in time when compared to their earnings performance. That does not mean that markets will come down very soon. Momentum is strong right now. When Momentum and liquidity takes front seat, valuations have to temporarily take the back seat. Eventually, a jolt will ensure that the fundamentals start dictating the terms again once exuberance is built in excess quantity.
Also markets have rallied to the extent of whooping 75% from Sensex 8000 to 14000 without any time consolidation. This makes the rise too steep, too soon. Markets can not keep on rising unilaterally permanently. It has to take a breather at some time once excess are built to a big extent.
Before we get next big up move in longer-term, I expect markets to consolidate or test lower levels as a step towards showing more solidarity for a larger up move. Take one more case – suppose even if the current momentum-led drags market to higher levels from here, sooner or later the much needed cool-off will be witnessed & the current levels will again come sometime in future. In fact, may be even lower levels. So, long-term investors should not get a feeling of left-out from the rally. They should stick with their present portfolio & ride the ongoing momentum. At least, they could see their losses getting trimmed out.
Note: I would rather recommend like to ask why would investors like to TIME the market entry? There is nothing guaranteed in stock markets. Neither downside, nor upside. Go for a Strategic approach. Buy some small quantity even now & more only on larger dips. I would like to remind investors of the strategy that i had posted in my 1st ever blog post of this site. Please go through it again, it makes decision-making process easy & less dictated by emotional calls. It saves one from timing the volatilty of the market.
Coming to very near term, markets have crossed Sensex 12000 with a cause of a big positive from Political front. This would ensure that we’re not to go back in the old zone so soon. Markets will hover around Sensex 13000 to 15000 zone for some time. Later it has to be seen what kind of resistance is being witnessed at higher levels. It has to be determined as to what kind is liquidity on the side lines makes the beeline for the market entry.
Many left out Mutual funds with huge cash positions have to ensure that they deploy the cash gradually into the markets to shield themselves from the ongoing momentum led bullishness. This will ensure that an able support is determined at every dips and lower levels.
The Big Bull:
A very big resistance and a test for markets will be around Nifty 5250 & Sensex 17000 levels. By above, I do not mean to convey that these levels could be tested. I just need to convey that this is the zone which could differentiate between a dawn of a new bull phase and lingering in the ongoing bear phase. Markets will find strong resistances around Nifty 5250 zone and Sensex 17000 levels. That will be the true test of the current rally.
Summary of the Post:
1) Are Large-caps Expensive?: Yes
2) Are Mid-caps Expensive?: Partly Yes
3) Is it Right time to buy for Long-term?: May be Not
4) So when to Buy for Long-term?: Wait for a substantial Dip.
but at that time don’t fret to buy when there is all-round selling.
5) What are Medium-term Supports?: Nifty 3800-3500-3150
6) How much has Indices appreciated from Lows? : A whooping 75%
7) Short-term Outlook: Range bound in Nifty 3800-4500 zone
8) Are Indian Markets still Coupled with Global cues: Yes
9) What could be the best time to buy for Long-term? Around Sensex 12000
10) Will Markets test Sensex 12000 soon? No, it will test patience.
Trading Call for Short-Term:
Power Finance Corporation (CMP 190)
Buy in 2 Small Tranches:
1st Buy around CMP 190-194
2nd Buy around Rs.175-180/-
Stop Loss: 169/- (Closing Basis)
Time Frame: Around 45-60 days
Target Expectation: Rs.225 when Nifty reaches 4500 levels
which is the upper band of our short-term range.
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