Get Ready For The Climb

The broader market index has moved up consecutively over the last two weeks and what is now important from the investors’ point of view is to see whether this momentum will continue or face some resistance. I feel that the market appears to be moving such that the support can be in the range of 3,900 to 3,925 and resistance in the range of 4,550 to 4,575. Any decisive move out of this range would determine the future course of action.  On the fundamental side, the government has announced that India is heading for a GDP growth in the range of 6.25-7.75 per cent.

The effect of the steps taken by the new government would be felt in the economic activity taking place from Q3FY10. A point of concern is that the government has given more thrust on growth as against managing fiscal deficit. But then just about a year or two ago investors were worried that the government was sacrificing growth to tackle inflation. It is ironical then that we are now concerned about the same government opting for growth. Inadequate growth with high fiscal deficit can cause inflationary pressures in the economy. Growth is crucial to manage the fiscal deficit. There would be a reason to worry about ratings in case there are hurdles for growth or there is a sharp deterioration in the external environment.

This pursuit for growth will lead to huge government borrowing in the current year but the government has indicated that it wants to borrow in such a manner that interest rates remain within a certain range. Going forward, the interest rates are expected to harden and may go up by 50 to 100 basis points with a consequent effect on the bond prices. Inflation is not expected to pose a serious challenge in the near foreseeable future. As for India Inc, its performance through the Q1FY10 results has shown a marked resilience to manage through difficult times. Initial results indicate that India Inc has been able to improve internal cash accrual. Cutting costs appears to be the mantra. However, it is still early days to form an opinion.

Good performance has been posted by sectors such as IT and banking. The results of Bajaj Auto have generated interest in automobile stocks while those of Bharti Airtel have made investors take a fresh look at telecom stocks. However, housing finance companies have disappointed the markets. With the results’ season already on its last leg the next trigger for the market will be the government its agenda of reforms. This has the potential to take the market to higher levels. Apart from this, improved visibility of growth, higher risk appetite of overseas investors, improvement of external environment and better performance of India Inc etc could be the other triggers.[PAGE BREAK]

The sectors which depend more upon domestic consumption such as FMCG, automobile, financial services including banking etc would do well going forward. For retail investors my advice is that they should follow the basic tenets of investing and not get carried away by the noise in the market. The current indications of the market point towards a fair chance of sustaining the uptrend. Those investors who have a high risk appetite can increase their exposure to equities either directly or through mutual funds.