India is hypersensitive about overseas perceptions about the country. The financial markets have tangible reasons to care, since foreign portfolio investors have a big influence on asset prices. The positive change in sentiment in the past few sessions has been driven by foreigners putting their money and mouths in the same place.
The first positive spin came via a version of “no news is good news” when there wasn’t a downgrade by Moody’s. The second positive was an “overweight” recommendation from Goldman Sachs. Goldman has an optimistic outlook on growth in 2013-14, and expects the Nifty to hit 6,600 by December 2013.
However, the Q2 Gross Domestic Product numbers backed a rider from Goldman that there won’t be a rebound in this financial year. At 5.3 per cent growth, the economy is headed for its most lacklustre performance in a decade. Among other agencies, both Standard & Poor’s and Fitch have negative outlooks and Barclays pointed out that consumption is weakening.
However, the foreign institutional investors (FIIs) placed more weight on the upbeat Goldman statements. The stock market surge came on the back of large FII inflows. In itself, that pushed the rupee back up. Uncertainty over the so-called US fiscal cliff and its handling could now take the rupee up further versus the dollar.
The fiscal cliff could also cause the euro to harden. The latest Greek bailout may have put a temporary floor on euro-denominated asset prices. It appears Greece won’t go (officially) bankrupt in 2012 though Moody’s has downgraded the euro stability mechanism. There is a reasonable case for taking long EURINR positions coupled to short USDINR in the next fortnight.
|Current (Nov 30)||Value
14 days ago
|Index dividend yield||1.4||1.5||-0.1|
|Index Book value||3.1||2.97||0.13|
|USD INR (RBI Ref rate)||54.52||54.9915||0.86|
|FII net buys/ sales(Nov 16-30)||7,570.23||3,348(*)|
|DII net buys/ sales(Nov 16-30)#||-1,482.33||-588.9(*)|
|# Rs crore, * Nov 1-15 net buys/sales|
On the political front, the United Progressive Alliance government seems a little more gung-ho. The rollout of the cash transfer scheme based on the unique identification numbers could give it some political leverage and plug leakages in subsidies. Parliament was semi-functional in the winter session but frankly, that’s better than expected. The Trinamool Congress’ no-confidence motion was a damp squib and the Dravida Munnetra Kazhagam came to the rescue on the foreign direct investment vote issue. That may pass now, though the Rajya Sabha will be a tricky numbers game.
The Gujarat Assembly election results will be interesting. Everybody expects a Bharatiya Janata Party (BJP) victory, but the margin will influence the choice of the next prime ministerial candidate of the National Democratic Alliance. Given the adulation Narendra Modi receives in some business circles, a big BJP win could lead to another burst of bullishness from large domestic operators.
The market has jumped 5.5 per cent in the last 10 sessions, hitting successive 52-week highs. Is this irrational? Probably. In the short run, there’s consensus the macroeconomic numbers won’t get better. Nobody expects a big earnings rebound. At a PE (price-to-earnings) of 19, the Nifty isn’t worth buying on short-term valuations in terms of either EPS (earnings per share) growth or interest rate yield comparisons. Most earnings projections for 2012-13 suggest EPS growth will be in the low teens. Interest rates are at eight per cent plus now for treasuries. Even if there’s a 100 basis points cut, that wouldn’t support more than a PE of 14-15.
Of course, optimists justify buying into the current market on the basis of long-term growth prospects. But any projections beyond 2014 should be hedged by the very real risk of political instability. We don’t know what sort of coalition will come into power after the next general elections and we don’t know what it will do.
The current upbeat sentiment may, therefore, be somewhat irrational but as a great investor once pointed out, markets can remain irrational longer than investors can stay solvent. Technically, a breakout to a higher high coupled to strong volumes offers a clear buy signal.
The over-optimistic underlying sentiment just means that one should be more cautious and keep tight stop losses while trading with this uptrend. One can easily see targets of Nifty 6,000-6,100 by December-end, but one can also see a possible pattern failure and pullback till the 5,575 level. Even lower actually if there’s exciting political shenanigans, which is always a possibility when Parliament is actually in session.
A rate cut could be the next short-term driver. But it is anybody’s guess if the Reserve Bank of India (RBI) will cut interest rates. Bond and Treasury rates don’t show signs of much change, which means expectations of a cut aren’t high. Subbarao implied he was thinking of a rate cut in his last review, but he could change his mind. If RBI doesn’t cut, there might be a cool off.
In corporate news, the GMR-Maldives face-off has interesting long-term implications, depending on how it’s resolved. Jet Airways and SpiceJet are seeing speculative long-term positions developed in hopes of an overseas strategic stake sale. The response to the big-ticket Bharti Infratel initial public offering (IPO) should give us a gauge of how deep and broad market sentiment truly is since an IPO offers segmented participation. The observant will note that domestic institutions and retail have remained bearish in the secondary market.
December often sees a big price surge as data-miners have pointed out. This is partly due to FIIs indulging in window-dressing before they present annual results. We may see it happen again this year. However, most FIIs have done pretty well out of India this year and it’s possible that they won’t see the need to window dress. Some may even book profits.
I’ve reiterated several times that it would be safest to stay hedged via deep Nifty puts until the end of the December settlement in case of a big correction. The last 10 trading sessions haven’t reduced the danger of a sharp pullback – they have just changed the levels. December will almost certainly be a big swing month. The current uptrend makes gains look more likely, but there is a serious chance of losses as well.