We spoke to some farmers, farm produce traders, and agri
scientists in Delhi, UP, Bihar and MP in past three days.
The feedback is as follows:
(a)
The reported loss of crop due to freak weather
is understated. Potato, Mustard, Channa, Moong, Wheat and green vegetable crops
in particular have suffered substantial losses.
(b)
Potato crop that is being warehoused suffers
from disease and excess moisture. At least half of this stored quantity is
expected to rot before it comes out. Expect sharp rise in potato prices in
summer months.
(c)
El Nino fears are real. Good storage levels in
reservoirs should help the irrigated parts. The late rains should leave good
moisture in land for early sowing of Kharif. But areas that have not received
late rains and depend on monsoon should suffer.
(d)
The expected boost to economy due to higher farm
income from Rabi may not materialize.
(e)
Edible oil seed crop should be poor. The rise in
palm oil prices due to crop failure in Malaysia should keep the pressure high.
We expect the food inflation to resurface again in 3Q2014.
We expect the fiscal pressure to exacerbate post election as
the new government tries to revive the public spending.
We also do not expect Ukraine controversy to subside in a
hurry. The crude price therefore may not fall substantially from the current
levels despite lower demand. Lower Chinese demand though will continue to push
coal, Iron ore and other industrial metals down.
We do not see much probability of rates easing in next
12months. Talk of Fed’s next step (rate hike) in 2015 should further provide
support to higher rates. It is therefore advisable to invest in accrual
products only. Duration play at this stage could be very risky.
Stock markets appear to be running much ahead of fundamentals.
The margin of error at this stage is close to NIL. Any material disappointment on
macro factors, political front or reversal in global flows could cause substantial
correction.
Technically, momentum has risen sharply in past one week. The
market is in similar condition as it was in October 2007 or October 1999.
Though this time retail participation is negligible hence panic reaction less
likely; nevertheless a sharp correction in next couple of months cannot be
ruled out. We advise (a) No leverage; (b) Low beta; (c) high quality; (d)
15-20% tactical cash.
Sector wise, we suggest overweight on reasonably valued
companies with low financial leverage and high operating leverage. Cement, auto
and select engineering companies will fall in this category. Maintain positive
stance on exporters (IT and Pharma) and defensive large consumers. The current
correction in these sectors could be an opportunity to buy.
We maintain our negative stance on commodities and PSUs.
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