So is it a good time to buy?

Last week, the Nifty had the perfect setup to break the resistance of 5200 - panic of pledged shares hitting the market, global cues not looking so great with the Greek overhang. However, it pulled pretty smartly from those levels. Not a technical analyst by any means (i tend to be a more bottoms-up person), I do have a lot of respect for what the market tells you. So, what exactly is the market telling us -

For one, the market has a strong resistance at 5200 and now people can go back to trading in the 5200- 5600 range. It would be crucial to see whether the market stays in this range or breaks the next resistance level of 5600-5700 on the upside or 5200 on the downside.

My view is the market would stay in that range till the Q1FY2012 results are out. If the results have a positive bias, very likely the range of 5700 can break. Companies like SBI, BHEL, L&T need to have better than expected results to carry the NIFTY to the next stage. If current leaders like Bharti and HUL, ITC disappoint, the rally could be shortlived and we would have more downside pressures. However, we cannot analyze Indian markets in isolation, as we noticed just couple of days back with oil prices being the single most important factor to rally the markets.

In terms of external factors, oil prices is certainly a big factor to watch out for. My sense is given that oil prices is also a big issue for the Obama adminsitration, it will not go pass 110. This being an election year, the Obama administration will try its level best to have a feel good factor for the US public. This means, Oil prices will not rise nor would US markets end lower this year (read risk trade still ON). The release of oil reserves was just one example of such an intervention by the Obama administration.

So, coming back to the question - is it a good time to buy. In general, i would hold on until Q1 results are out. I would also look at a number of niche industrial companies which seem to have fallen off the cliff due to rise in commodity prices and/or policy decision paralysis, however, these are niche companies and market leaders in their space.

Short DM, long EM

The trade for the rest of the year is "Short DM, long EM".

With QE2 coming to an end and the Euro land falling apart, there are no positive triggers for the DM part of the world. The DM market is still pondering whether the recent slowdown in the job market is a sudden skittish stop in the economy or couple of months of slow job growth. People have still not fully factored in the lack of QE3 in the coming months.

On the other hand, the EM market has gone through the pain of correction in the first half of the year with most of the indices correcting 10-15% and now have reasonable sub to mid teens valuations. Also, prices of crude oil have moderated to sub 100 levels and central banks have taken measures to curb inflation. More specifically, for India the current rate hike may be one of the last few rate hikes.

For emerging markets, a key question is where the next margin improvement will come from. If improvement does not materialise, we could see a trading range for emerging market equities, but if the market realises that company margins over the next few quarters are sustainable, the stock prices should start rebounding gradually and consistently. I think there will probably not be a huge uptick, but more a steady improvement for the rest of
2011 on an absolute and relative basis. This should compare favorably in comparison to DM's which are bracing for lack of liquidity, high unemployment rates and possibly inflation (the dreaded stagflation phenomenon)

Another company under the "scam" radar

Isn't it interesting that a company's stock falls 30% in a single day over allegations on the promoter's brother being involved in a scam, with no apparent correlation as to how this news might directly impact the company's operations. Now, i am certainly not commenting whether this is justified or not. What i find noteworthy, is that when analysts analyzed the said company, they got excited by the near monopoly the company enjoyed in its markets and super normal returns. Clearly, one of the moat(now risk) highlighted by many buy side analyst before numerous Investment Committee's was the "political closeness" the company enjoyed.

Clearly in the last several months "political links or being on the right or wrong side of the aisle" has become an increasingly important factor when analyzing companies. In the past, analyst use to shrug this factor as the way business is done in India or cost of doing business in India. However, in the last 6 months or so after the 2G scam and Anna Hazare and Baba Ramdev's fasting episodes, I think it has become a very important screen and probably the first screen a company has to pass to guarantee long term sustainable returns for its investors. What we are witnessing here is growing maturity of the indian markets and even though this might be a bump in the short run, longer run the move by institutions and retail investors to punish companies with poor corporate governance records paves the way in making India a safer and sustainable place to invest.

Clearly the findings of Mckinsey's survey bears greater significance
A premium for good governance
https://www.mckinseyquarterly.com/A_premium_for_good_governance_1205

On another note to my fellow investors - would love to hear any frameworks you have to analyze "political closeness" or is it just better to not invest in such companies.

Can the sensex see 16000 again?

I saw the commentary by Mr. Mukherjee of Ambit Capital - his prediction is that Sensex could touch 16000 by end of June. Very interesting.. he is of the view that the current climb is on the heels of FII inflows with no change in fundamentals. Clearly the DII's are not buying. So is this sustainable or we slated for another correction? I will draw you two scenario's -

Firstly the bear sceario that Mr. Mukherjee paints - the FII inflows could stop if Bernanke turns off the liquidity tap. Bernake could do that if inflation fears are real - the unemployment rate is falling and their is an increase in real wages. Clearly, that does not seem to be the case. More likely, the sensex could see 16000 if Indian companies disappoint on earnings due to margin pressures (increase in input costs and increase in wages). The FII's in that scenario are likely to see India as a more risky asset class in comparison to the US where economic recovery seems to have real legs and hence move money out of India.
However, there is a 50 percent probability that companies might just deliver and more money could flow in.

So in the extreme bull scenario - the FII's continue to pour money due to better than expected company results, morever the Indian policy makers shift gears after the state elections and actually make investments in the last year of the five year plan - infra sector which has been the lagard until now starts performing and the gdp grows due to investment spending.


I will let you decide, which scenario is the most likely?