Investonomics-ManFina-Series 7

Markets round up

Nifty ended at 5200+ levels for the week ending 27^th Jan 2012 nearing our target of 5250(recommended in our last blog)-200 DMA for nifty which currently is at 5208. The week also had bought a sigh of relief in many investors mind as this was week where RBI had cut CRR(Cash reserve ratio) by 50 basis points which was more than expected move by the central bank and due to which market sentiments improved and we saw all-round buying in all type of stocks(Large cap,Mid cap & Small cap). Particularly where the stocks were beaten down has risen up almost 80% from there recent lows. This phenomenon was already highlighted in our earlier bog wherein we have mentioned that the time is of value buying. Investors who have bought as per our recommendation have hugely participated in this rally with a decent return in their pockets

Also we have been able to take a call on currency markets correctly by letting our clients booking the dollars forwards@52+ levels as we were seeing a great strength in Rupee because of Dollar inflow in the country as per reasons mentioned in our Series -4. Particularly capital goods sector was recommended in equity only because of this reason. Our investment in G-Sec also gave returns of 15 to 22% in last 1 month wherein we still remain bullish with exposure increasing in G-sec and Fixed instruments like Tax free Bonds while we will now start reducing exposure from Equities.

The love of liquidity-From USA to India Via Europe

A look at the previous months events suggests that while the love of Liquidity continues with all the political leadership & the central banks across the world, the new thing which happened in India is RBI also jumping into this bandwagon of providing liquidity in the system by cutting CRR by 50 basis points and managing an inflow of almost Rs 32000 crores into the system.

There are some questions which come to my doubtful mind as to why there was a CRR cut rather than a Repo cut which could have helped a high interest paying reeling industry. While I find that pushing liquidity into system has been a common practice  in EU & US as they poses a systemic risk/chances of collapse of banking system due to liquidity in there respective countries, does RBI  also foresee/fear this risk in India due to shortage of liquidity? A question might arise in your mind that how can India have shortage of liquidity. Well, you might be aware that 40% of our exports come from 2 regions-EU & US & the share of EU & US in world total trade is roughly 35% of total trade done, so any crisis in EU or US or both will lead to world being lead in to depression due to shortage of liquidity or in other terms lack of confidence in currency or currency crisis due to sovereign debt problems.

To make the above lines more simple we must know how much of my money is at risk if the EU crisis occur? Simply put it 30 to 40% of money or expected export realization for exporters from India. Such big is the cause of this crisis & Central banks all over world are pushing liquidity in the system just to avoid this crisis

Markets beyond 5200

While FIIs have pumped in large chunk of money since 1^st week of January & their investments have earned them far superior returns as Rupee also has appreciated by almost 10% from 54 to 49 levels till the time I write this & Nifty going from 4700 to 5200 levels and at the same time I do not find any major event in EU/US till February end there is a reasonable certainty that markets have a potential to go up by 5-7% more, might be Nifty at 5400-5500 looks achievable. Also reasons as mentioned in my earlier blog like Indian Budget Session might also help sentiments in good shape. This last leg will be very widespread with stock prices going up like there will be no tomorrow, I caution my readers not to get attracted by this fancy & reduce exposure at these levels.

I expect the coming budget to be a highly inflationary budget & a Pro-Public budget rather that Pro-Industry budget. Also if our Finance Minister has to resort to Fiscal discipline then this budget is sure to raise Indirect taxes which will again hit Industry . Will highlight some more issues in my next blog. Enjoy the rally!!!