Volatility Will Rise With Newer Market Highs

Nagji K Rita
Chairman & Managing Director
Inventure Growth and Securities

A LIQUIDITY-FUELLED HIGH

• India is overperforming as compared to the other emerging markets, and this rise is being fuelled by liquidity. Over the past two months, FIIs have invested close to USD 4 billion here.

MARKET STIMULI

• Among the key triggers for the markets in the coming days are the expectations from the 2014 elections and the results, the grant of new banking licenses, foreign banks coming to India and the movement of crude oil prices.

The Indian economy is currently showing signs of weakness. The GDP has dropped below five per cent, inflation is hovering in the range of 6.5 per cent, interest rates are at 7.75 per cent and the IIP is oscillating between the positive and negative territory, with the last reading at around 0.6 per cent.

However, while the economy is showing signs of weakness, the country’s equity markets are gaining at a fast pace and have risen by over 15 per cent in the past two months. India is overperforming as compared to the other emerging markets, and this rise is being fuelled by liquidity. Over the past two months, FIIs have invested close to USD 4 billion here.

In fact, liquidity is driving not only Indian markets but also the global ones. The Dow Jones Industrial Average is trading at its lifetime high levels. Money (liquidity) is chasing risky asset classes like equities. The favourable quarterly results are boosting investor confidence. At a certain point, we believe that the macro economic variables are being ignored, at least in the short term.

Most of the corporate results for Q2FY14 have been in line or have been above estimates. This has spurred bullish expectations for H2FY14. In fact, the results of some of the PSU banks have completely surprised the street.

In the months of August-September 2013, the INR saw a sharp rise against the USD and an equally sharp fall. We believe that the USDINR is now on a downtrend. Whatever rise we see would be a short bounce up, and will be followed by phase of consolidation or downfall. At the moment, the 63.50 level can act as a resistance.

The RBI has done its bit to control inflation, and in the process, has raised the interest rates several times in the past few months. However, going by the comments from the apex bank, we get a sense that the rate hiking spree may take a halt going forward. Food inflation numbers will be keenly watched, and a correction there may result in the overall inflation cooling off a bit.

There are several triggers for the market going forward. Key among them are the expectations from the 2014 elections and the results, the grant of new banking licenses, foreign banks coming to India, the movement of crude oil prices in the coming days, etc. Apart from this, if the international subsidiaries of Indian companies (for eg. Corus for Tata Steel) show some improvement, that would also result in a change in estimates for such companies. Another notable fact is that some companies such as DLF and JP Associates are working towards reducing the debt on their books by selling off non-core assets. We believe that this will enable these companies to focus on their core business and will also help to reduce the overall interest costs.

Currently, the sectors that look promising are banking, telecom, engineering and construction, metals and oil & gas. Certain stocks in these sectors show immense upside potential and could beat the returns that are expected to be delivered by the benchmark indices. On the other hand, sectors such as FMCG, cement, IT and pharma could take a backseat in this fresh rally. Investors can also generate above average returns from certain Mid-Caps which have good business models, a sound management and are currently trading at beaten down valuations due to the economic slowdown.

Retail investors must understand that as the markets rise to newer levels, volatility will rise. In such a scenario one must have a mix of Large-Caps and Mid-Caps in the portfolio. Staying invested will help. If you are a trader, you are advised to use stoploss as a risk management tool.