“Have faith in God. But never forget to lock your car.”
Indian equity markets witnessed substantial rise in volatility
and short term momentum last week. There were multiple immediate triggers to
cause this.
Some hope raising economic data from western world that sparked
the fears of Fed tapering the magnitude of monthly bond buying. Some knee jerk
reactions from RBI and government raised concerns that clock may be set back to
early 1990’s on Liberalized Exchange Rate Management System (LERMS) and
Liberalized Remittance Scheme (LRS). Onions threatened to undo whatever
governor Subbarao achieved in past couple of years. Yield curve topping ~9%,
raising fears of imminent rise in lending rates jeopardizing prospects of any
imminent economic recovery. Prospects of some distress selling by large brokers
to fill the hole created by reincarnation of Harshad Mehta in NSEL.
Thankfully, no one yet talked about a systemic crisis in equity
market; though sharp spike in implied volatility and consequently option prices
does make a case for a crisis this week. Watch out for liquidity in at the money
(ATM) and close to ATM put options. Any sign of illiquidity there should prompt
a panic like reaction. Remember, on past two occasions, options becoming
illiquid after a couple of days of rise in IVs, has led Nifty to move 5-10% in
a single trading session.
The just concluded result season and latest round of macro data
has not offered much hope. The commentary, except from handful of technology
and pharma managements, has been guarded. The good part is that the hope
appeared still alive. The bad part is that investors are not willing to give
any benefit of doubt. Any sign of weakness in performance or lack of conviction
in outlook has been punished severely.
We would therefore like to reiterate the strategy discussed
earlier this month:
(a)
Overweight on consumer companies (FMCG and
Auto). Telecom likely to do well, but we suggest avoid due to continuing
regulatory uncertainty. In our view, with consistent margin improvement and
~3-5% volume growth, these companies will more than address the valuation
concerns, insofar as currently high P/E ratio is concerned. Moreover, expect
payout and ROEC to increase.
(b)
Nil to extremely low weight on financials. Some
financials have reported decent growth in income and margins though the asset
quality has deteriorated substantially. The market reaction to their results is
a clear indicator that investors are not convinced about the sustainability of
their profitability. There is obviously more pain to come in following
quarters.
(c)
Overweight on large global businesses, i.e., IT
and pharma. Avoid smaller companies in this space.
(d)
Nil to very low weight in capital goods and
infrastructure. Remarkably positive commentary about future outlook suggests
that many of these companies continue to be denial mode and therefore may not
have taken adequate corrective measures.
(e)
NIL weight in commodities Most of these have
indicated sever margin pressure, lower capacity utilization and cut in capex
plans.
Thought for the day
“How do you nurture a positive attitude when all the statistics say you're a dead man? You go to work.”
-Patrick Swayze (1952-2009)
Word of the day
Impolitic (Adj):
Not politic, expedient, or judicious
(Source: Dictionary.com)
Shri Nārada Uvāca
Will 2% CSR spend by companies likely go to fund local politicians only?
No comments:
Post a Comment