Tuesday, September 18, 2012

Market Update : dated 16-Sept-2012 : Bounce Back


Sent: Sunday, September 16, 2012 11:09 PM
Subject: Market Update : Bounce Back : Week ended 15-Sept-2012

Dear Sir,
Greetings from EASY Investments.
We hope you saw our previous email on “Market update: Roller Coaster Ride dated 6th Sept 2012”. We mentioned that this Government (Govt) has hardly got 5 months to deliver. And we ended the mail as “Be it MOST-STP (or) MOST-VIP (or) plain adhoc investment - investors need to make use of the current pessimism. Though many of the investments made in the past have been languishing, valuations are at very attractive rates. Current Price Earning ratio of index is 13, when compared to average of 18. No doubt - volatality is bound to persist. With suitable investment strategy, you can beat the actual index and get maximum benefit. ”
The message was clear. But did you act on it - it is time to ask yourself.
Meanwhile, following events ( some of them indicated in our previous email ) triggered the market which rallied by solid 781 points (4.4%) to close at 18464 on Friday the 14th of Sept 2012. And many stocks gained any where between 5 % to 20%. List of these weekly gainers are attached for your kind information.
·         With Coal Scam hitting the parliament badly, Govt seems to have done their home work carefully and restrategized their approach. They lined up a series of announcements / events which one after another would baffle the opposition. At the end, even if they get through 50% of what they proposed – they have made a progress.
·        The tone for rally was set on Wednesday (12/09/12) morning when the Industrial productivity IPP data was released as 0.1% Vs (-1.8%) in previous quarter. Arguably, it means we have not grown instead of negative growth. But this was perceived as first positive message.
·         Following this was the long pending agenda of fuel price hike. Govt preferred to time this announcement after market hours on Wednesday. Price of ‘general’ diesel was hiked by Rs.5+ (12% hike) and the subsidized gas per connection of LPG was restricted to 6 per annum. And the beauty is the price of ‘premium’ petrol (+Rs.6) and ‘premium’ diesel (+Rs.16) were hike steeply many did not take note of it. But Govt has clearly played this game well. Even if they have to compromise on diesel hike – say by revising the hike to Rs.3 or so, they may get through with the LPG Subsidy revision and the price of premium petrol/diesel.
·         Meantime International news trickled in: with US FED coming out with ‘unlimited’ buy back option of bonds to strengthen their economy. In the views of analyst – this QE3 was much bigger than earlier 2 QE’s which were announced during Lehman crisis and subsequently. This infused huge cash in the market. This was on  Thursday night.
·         Obviously Friday’s market opened by solid 400 points plus on BSE (up by 2%+). Then came the inflation data which was not great. Inflation inched up to 7.55% Vs 6.87% last month. Logically market should have reacted to it – but market maintained its lead and BSE closed up by 443 points .
·        Then came the big-bang announcements on Friday evening: Allowing 51% FDI in retail, 49% FDI in Civil Aviation, 49% FDI in power exchanges, 74% FDI in broadcasting sector, disinvestment in four PSU companies – Hind Copper, Oil India, MMTC and Nalco.
·         The so far docile, policy paralyzed Government all of a sudden gave series of booster dose to revive the economy. With genuine intention to reduce the fiscal deficit and keeping the reforms agenda, industrialist / economist and stock markets cheered alike.
·         On Monday, RBI’s interest rate policy has been lined up. If there is a rate cut, then market is likely to fire up further.

And the logical outcome of these events are:
·        After a long gap, it has been a sigh of relief for the industries. As Prime Minister quoted “It takes courage and Some risk to break policy logjam.”
·        Opposition and Allies are taken aback by the new found zeal. Now each one of them will be busy objecting to one announcement or other – but never together. That is a clear game of ‘Divide and Rule’.
·         And the prime minister is now busy in Cabinet shuffle. It is clearly mentioned that some of the allies are likely to get ministerial berth. That is a strategic way of keeping the allies happy, keeping the government stable and push across with reforms.
·         Hike in fuel price and rationalization in Gas subsidy was need of the hour. This could address the swelling gap in subsidy bill.
·         No doubt FDI in Aviation is the need of the hour to save an ailing industry.
·         FDI in Retail – though debatable – has been on expected lines. And the beauty is, state governments will take final call on weather to allow FDI in retail in their states or not. This is like shooting the ball to your court. Opposition or allies who are against FDI in retail have the option to deny such stores in their state.   
·         Disinvestment – in the four companies mentioned above to bring in about Rs.15000 Cr to the Govt.
·         As mentioned in our earlier mails, revival of monsoon would result in fall in inflation.
·         Tough everything looks rosy- it may not be a cake walk for the Coalition Government. There is a remote chance that some of the ‘adamant’ allies pull down the government – but cannot be ruled out.
·         Wheather all these actions / announcements / likely oppositions would really help in changing the perception on India in the view of rating agency is yet to be seen. If policies are not implemented, then they may go ahead with downgrade which could negatively surprise Indian economy and the stock market.

If the policy makers could negotiate on some reforms and yet push through, then it would be a huge victory. And in Investment, the most important but ignored fact is EXIT : Exiting an investment is much more important than making an investment. 

As one investor called me last week to complain that his investment in shares have hardly delivered 10% returns over past two years, I had to clarify that in the past two days these stocks could have delivered 10%. That is the power of stock market. All you need is patience to make that return.  

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