Indian Stock Markets - Uptrend Ahead
Ali On Content / 04 Jul 2011
Factors that are plaguing the markets currently are set to dissipate from the second half of the current fiscal. There looks to be a good chance of a forward push in the market from thereon.
The results’ season for the March quarter got over by May and was largely on expected lines. However, there was a lot of divergence of performance among different companies within particular sectors too. As such it provided a good opportunity to reallocate assets from underperforming to outperforming companies. Overall the markets at this point of time are getting influenced more by global developments as most of the domestic factors that were negative for the markets have been already factored in. The key will be to watch the results’ season for the quarter ended June 30 which will give a much better idea about the health of the corporate sector in light of the rising costs and the slowdown in the economy.
The downside risk to the equity markets is very low at this point of time and it looks like the February/March lows of the markets will hold and form the base for a strong upward movement over the next one year. The events to watch over the next couple of weeks will be the direction which the bailout of Greece takes and the extent of correction in the commodity prices. Going forward, sectorally we believe that it is time to look at those sectors that benefit from a commodity price correction. The slowdown in the glob-al economy combined with the refusal of the US Federal Reserve to go in for a fresh round of quantitative easing (QE) is likely to result in a significant correction in commodity prices over the next few months.
Therefore, sectors like banking, capital goods and infrastructure among the large-caps and airline and tyre stocks among the mid-caps look good. The biggest trigger will obviously be the lower input costs due to the commodity prices coming down as well as the fact that in my view the rate hiking cycle of the RBI has come to an end. The consensus view among economists is that there will still be further rate hikes but looking at the global growth picture, slowdown in China and the likelihood of a severe sell-off in global commodities I believe that the RBI might not hike rates any further.
These factors will have two impacts. Due to the input costs coming down the margin picture for the companies will improve from the second quarter of the current financial year and also into the next year. Secondly, due to the interest rates stabilising and possibly coming down, the downside risks to economic growth as well as the impact of high interest costs on corporate results will start receding. The markets are setting up for a very strong upward spiral in the second half of 2011 and there is likely to be a reversal of the ‘buy developed markets’ and ‘sell emerging markets’ trade in this time period.
At this juncture when there is there is total apathy towards equities, it is a good time to build a portfolio of strong large and mid-cap stocks. Valuations are cheap relative to the growth prospects, especially in mid-caps where valuations look similar to the 2004 levels. Investors who build a strong long-term portfolio at this point of time without bothering about the immediate two to three weeks should create good returns over the next two years.
The downside risk to the equity markets is very low at this point of time and it looks like the February/March lows of the markets will hold and form the base for a strong upward movement over the next one year. The events to watch over the next couple of weeks will be the direction which the bailout of Greece takes and the extent of correction in the commodity prices. Going forward, sectorally we believe that it is time to look at those sectors that benefit from a commodity price correction. The slowdown in the glob-al economy combined with the refusal of the US Federal Reserve to go in for a fresh round of quantitative easing (QE) is likely to result in a significant correction in commodity prices over the next few months.
Therefore, sectors like banking, capital goods and infrastructure among the large-caps and airline and tyre stocks among the mid-caps look good. The biggest trigger will obviously be the lower input costs due to the commodity prices coming down as well as the fact that in my view the rate hiking cycle of the RBI has come to an end. The consensus view among economists is that there will still be further rate hikes but looking at the global growth picture, slowdown in China and the likelihood of a severe sell-off in global commodities I believe that the RBI might not hike rates any further.
These factors will have two impacts. Due to the input costs coming down the margin picture for the companies will improve from the second quarter of the current financial year and also into the next year. Secondly, due to the interest rates stabilising and possibly coming down, the downside risks to economic growth as well as the impact of high interest costs on corporate results will start receding. The markets are setting up for a very strong upward spiral in the second half of 2011 and there is likely to be a reversal of the ‘buy developed markets’ and ‘sell emerging markets’ trade in this time period.
At this juncture when there is there is total apathy towards equities, it is a good time to build a portfolio of strong large and mid-cap stocks. Valuations are cheap relative to the growth prospects, especially in mid-caps where valuations look similar to the 2004 levels. Investors who build a strong long-term portfolio at this point of time without bothering about the immediate two to three weeks should create good returns over the next two years.
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