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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