Tuesday, March 11, 2014

Strategy update

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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