Patience Will Pay

Situations change. And, so does the market. In fact, the comfort zone lies in the knowledge that the current state of the market shall not remain so forever. As the fiscal situation improves, so will the movement in the market.

Currently, India is impacted by higher commodity prices which is leading to higher inflation and thus an environment of higher interest rates. But if the oil prices correct to the level in the range of $100 per barrel, then definitely it will be a big positive for the market.

The second thing to look at is how demand is going to pan out. And if the numbers on the economy come right it will have a very positive impact on the market too. As we are in the election year, we might not see any bold measures from the government on reforms. We believe that till December 2008, if the oil remains in the range where it is now then the market will trade in the broad range of 13,000 to 16,500.

If we look at the overall open interest positions in the derivatives segment, it really indicates that currently the market is very light. So there is very little chance of a tussle between the bulls and the bears in the very short term. Currently the market is cheap as compared to the valuations but the macro environment is really tough which is very strong and impacting the market. The market has already bottomed out, so it may trade in a narrow range but if we see some of the positive triggers coming in the market then we may see a rally.

We are confident that it will be above the 7.5 per cent level. And the forthcoming triggers for the markets will include the reformist measures taken by the government especially in the power, infrastructure and the banking sectors and secondly, the crude prices going down. These are the two important triggers that might play out in the market.

We sense that the world economy will be facing a tough time in the next one year or so because our view is that the credit crisis is still not over. Thus the world economy will face some sort of trouble in the coming period as well as in CY09.

Looking at the entire scenario from a medium to long term view, we are positive on infra space and if the interest rate comes down, then we are positive about the banking sector too. We are also optimistic about the pharmaceutical and FMCG sectors. But in the short term, we would rather focus on the agriculture sector. In this range bound market, we expect the mid caps to outperform because the valuations in this segment have corrected sharply. But if the broader market performs then we feel that even the large caps might do well.

We feel that the current rally in the crude oil market is fundamentally driven by the decline in supply, but if we see the oil prices correct from here it will be mainly due to the demand destruction rather than increase in supply. And it will have a huge impact on an oil importing country like India. The market has already priced in the inflationary margins because last year we had a lower inflation rate of 3.5 per cent. So due to the lower base effect and rising commodity prices, we might see the inflation crossing 13 per cent. But we might not see any interest rate hike from here on. However, one can expect a further hike of not more than  25 basis points for both repo rate and CRR. Thus, consumer related sectors like auto, real estate, and to a certain extent, capital goods and smaller construction companies might be negatively impacted.[PAGE BREAK]

We would advise the retail investors not to speculate much in this type of market where we see the sectoral rally changing very fast. One should try to have a longer investment horizon as we believe that global liquidity on account of higher commodity prices is likely to remain good and money will move towards the destination where the growth is and India will be among the top five destinations to which investors will rush to have a slice of the pie. From this level, one should expect a 15-20 per cent CAGR in 2-3 years.