Thought for the day
“In order to carry a positive action we must develop here a positive vision.”
-Dalai Lama (Tibetan, 1935-)
Word for the day
Venerable (adj)
Commanding respect because of great age or impressive dignity; worthy of veneration or reverence, as because of high office or noble character:
(Source: Dictionary.com)
Teaser for the day
What if B. S. Yeddyurappa and Pawan Bansal win top leaders of AAP lose the elections?
Would that mean victory of evil over good or just that the current movement against corruption is misdirected?
Markets still in twilight zone
I firmly believe that Indian equities completed a four and half
year (July 2007 to December 2011) bear market in mid 2011.
The bear market was mostly led by slowing trend growth due to
declining investment and consumption demand, steady deterioration in macro
indicators like inflation, fiscal and current account deficit, exchange rate,
rise in cost of capital and labor and derating of PE ratio of Indian equities.
The period was marked by negative real earnings and wage growth.
The bear market witnessed couple of profound swings during June 2007 to January
2008 and September 2008 to May 2009 but mostly ended on a flat note in terms of
the benchmark indices (Nifty 4500 level).
In the bear phase – the leaders of 2003-2007 bull market, i.e.,
credit and investment, were completely decimated with an overwhelmingly large
number of stocks losing 75-90% of their peak market value. Defensive consumers,
pharma and IT stocks gained in market value bringing the benchmark indices out
from a deep abyss.
Global events like collapse of US investment bank Lehman
brothers leading to freezing of global money and credit markets, fiscal crisis
in Europe raising widespread concerns over feasibility of common currency area
and substantial slowdown in consumption levels across the globe contributed to
the bearish trend.
Since beginning of 2012 corporate earnings have bottomed out and
showing a rising trend albeit at a slower rate. Macroeconomic indicators have
begun the correction process and are forecast to show material improvement over
next couple of years. Market volatility has bottomed at lower level and showing
early signs of rising. The supporting global environment also appears
relatively stable.
The benchmark indices have undoubtedly raced to their all time
high levels. However it would be a mistake, in my firm opinion, to consider it
as a bull market. There is little evidence to suggest that the current pace of
gains in equity prices is enduring or we could see sustained up move from here
over next 12-15 months.
The market internals suggest that (a) volumes are too low for a
sustained bull market, (b) volatility is too low for a large push up; (c)
market breadth continues to be disappointing indicating shallowness of up move;
(d) expected risk adjusted return on equity alternatives like fixed income,
gold etc. is still higher as compared to equities; (e) capital market appears
ill prepared for capital raising plans; (f) the impact of inevitable reversal
of global rate cycle is yet to be assessed.
The increased foreign participation could be entirely due to
rebalancing of overweight debt portfolios ahead of rate cycle reversal expected
in 2015. It may not be reflection of the attractiveness or otherwise of Indian
equities.
The market therefore, in my view, continues to be in a neutral
trajectory. The course will continued to be marked by frequent sectoral
rotations giving trading opportunities and slower momentum in terms of
volatility and volumes. The strategy here should be two pronged – (a) trade and
(b) prepare for the next bull market to begin.
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