Thursday, May 14, 2015

The morning after

Thought for the day
"Moral excellence comes about as a result of habit. We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts."
-          Aristotle (Greek, 384-322BC)
Word for the day
Hidebound (n)
Narrow and rigid in opinion; inflexible.
(Source: Dictionary.com)
Malice towards none
Luxemburg PM comes out and marries his gay partner. The country celebrates.
Wonder, will someday we also accept that the politicians too have a right to personal life and politics has nothing to do with it!

The morning after

A sense of unease has been palpable amongst large investors since past few weeks. This is a typical case of hangover after a spell of ecstasy and overindulgence. It shall pass over soon and normal market order will be restored, in my view.
In the interim, shooting pain, nausea, wooziness accompanied by sense of despondency and rejection are natural occurrences.
In one such example, the global investment bank HSBC has downgraded Indian equities to underweight, citing "slowing earnings growth, little room for rate cuts and potential negative impact from an unusual weather due to El Nino".
I see more such downgrades over next 3-6months.
The primary reason for this pessimism, in my view, is the Newton's law of motion. The more an investor got excited in post election euphoria, the larger are the chances of his swinging to the other extreme.
I believe, for taking a holistic call on Indian equities, we need to first eliminate the impact of election results from the market statistics. The macroeconomic data and corporate fundamentals are not impacted materially by the political changes.
By assimilating the market statistics to macroeconomic trends we may discover that contrary to popular perception, the market fundamentals might have actually improved over past one year, inasmuch as that (a) the process of bottoming in most macro indicators has progressed well; (b) most frontline companies have achieved sustainable cost efficiencies; and (c) many relevant companies have restructured their balance sheets by selling assets and raising fresh capital.
This improvement in market fundamentals will look relevant and substantial once the stock prices shed the flab accumulated during post election euphoria.
The morning after, I am excited and waiting to catch the pendulum at the other end.
Hangover - I : Political sloganeering giving way to economic reality
 

...macroeconomic indicators bottoming out gradually

 

 

Cleansing in financial system to kick start the economy
The extreme stress in the financial system is hindering the economic recovery in India. Unless the banks and financial institutions take the bitter pill and clean up their accounts, the fresh credit cycle cannot begin in the right earnest.
The recent management commentary of two largest public sector banks PNB and BoB, indicates that the process might just have started and should be largely completed within this fiscal year.
This effort duly supplemented by re-capitalization of PSU banks (the process begins with SBI) should see normalcy returning to the credit market.
Agreed that it is much easier said than done, but inevitability of the process should enforce execution, in my view.
In the meantime however, the investors in PSU Banks and stressed companies will continue to suffer pain. The industry leaders with stronger balance sheet should see good days with decent assets available at bargain prices.
Better fuel availability (Coal, LNG and nuclear fuel) should resurrect the troubled power sector in next 12-18 months.
Commencement of mining operations later this year should also help road traffic and CV sales.
Technically speaking - not worried as yet
The Indian benchmark indices have corrected 10% from the all time high level recorded last month.
Nifty peaked on closing basis at 8834 (13 April 2015), 2% below its all time closing high of 8996 (03 March 2015). However, the fall being broad based, sharp and normal (upto 10%) is not worrying from midterm perspective. It would still be normal if it corrects couple of percentage points further down. I see this as the likely scenario.
However, a close below 7860 on Nifty would rattle a lot of nerves, as it would open the probability of full 20% correction and end of bull cycle that commenced on 30 May 2014 from 7230 level. I see this as least likely scenario.
The benchmark indices however should move in a downward sloping channel making a lower top - lower bottom formation over next four months.
The large cap will materially outperform the mid and small cap in this phase.
The probability of a full 20% correction that would end the current bull market looks remote at this point in time. But may need some allowance to be made, should Nifty closes below 7860 in next 5 trading sessions.

 

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