Markets will go up for next 3 to 6 months
INSIDER
The domestic markets have been out-performing their global peers in
the past few trading sessions. The strong growth in the economy has
pushed investor sentiments. Foreign institutional investors (FIIs) are
increasing their investments in the domestic markets and have been
supporting them to trade higher.
The short-term view is that the equity markets will go up for the next
three to six months. They can do well as the underlying economies
continue to expand and the valuations do not seem particularly
aggressive at the current juncture.
Growth data: The reasons for this optimism are many. Growth is good as
India is set to expand by 8.5 per cent this year. This implies that
the nominal growth rates are phenomenal. If the real economy can grow
at 8.5 per cent, and if you add inflation to that at 7.5 per cent on
an average, the nominal GDP growth of the economy will be around 15
per cent.
What is more important is that India could be back to a nine per cent
kind of growth momentum for the next few years. So, there is a bit of
a possibility that some analysts are just not bullish enough as far as
the Indian growth is concerned. That market participants are very
skeptical about the current run up in the markets is obvious from the
fact that the Nifty goes up 120 points with high volumes but the
VIX-volatility index, instead of moving down, actually moves up 15 per
cent. This is quite startling because they should actually move in
opposite directions. This shows that many analysts are probably
under-estimating the pro growth bias here.
Improvement in consumer sentiment: The economic growth in India is for
real and what is working well in India's favour is the rising domestic
demand and steady or falling commodity prices. There is significant,
almost dramatic, improvement in consumer sentiments among the urban
middle income segment and agricultural segment in the rural areas. The
rural economy is acting like a built-in stabilizer.
This probably could be the best thing for a strong revival in
consumption. The start of the festival season adds to the expectations
of higher consumer demand. Many retailers expect the year-on-year
sales growth to be around 25 per cent this year. Inflation and
interest rates Growth brings along with it some threats - inflation
for example, which remains on the horizon.
Rapid growth and high inflation rate have compelled the central bank
to lift interest rates four times in the past six months, the latest
being last week when the Reserve Bank of India (RBI) hiked the repo
rate by 25 percentage points and reverse repo rate by 50 percentage
points. The hike in rates will lead to a rise in cost of funds for
banks eventually, making loans more expensive. This will drive down
consumption to some extent which has been ballooning lately. The
tightening in the monetary policy is to take the situation as close to
normal as possible.
Liquidity support for markets: There is abundant liquidity/inflow
supporting the markets right now. This can be viewed in two parts -
fundamentals and flows. In the short term, the markets are driven more
by flows than by immediate fundamentals.
Currently, offshore flows are driving the markets. George Soros , the
well known investor, says, India is doing very well and in fact, the
great hope is that India would develop faster. From India's
perspective, the current macro situation is interesting. If the US Fed
goes in for further quantitative easing, there will be another boost
in liquidity for markets here. Sub-par growth in the US but ample
liquidity is a pretty potent and positive combination for India.
Consolidation is the key: What the stock markets sorely need now is a
strong bout of consolidation. Consolidation will help move higher on a
sustainable basis rather than a quick dash up which may not be
sustainable. So, a little bit of consolidation would be good for this
market for it to move higher on a stronger foundation. As of now, a
few stocks are continuing to trend higher and actually support the
markets. This is positive for the markets but it will be better if the
markets have a consolidation soon before trending higher.
Investment strategy: Investors should increase exposure to sectors
such as industrials and simultaneously taking money off the table of
sectors that have delivered well such as financials. Getting out of
banks and into some of the sectors that have lagged like technology
may help investors generate returns in this market.
These rotations might be more interesting than the overall market
level over the next few weeks. Commodities hold potential Metals have
been massive under-performers against the broader market from a
year-to-date (YTD) basis and are available at good values. The
under-performance of the sector reflects the mood of the market
participants. Many were worried about a double-dip in the developed
economies and that China's consumption may come down. Metals qualify
as both an investment and trading opportunity.
Stay invested: Investors should have a stock-specific approach,
monitor their stocks regularly, and should continue to stay invested,
not giving too much importance to the level of the indices.