Market Outlook May 12, 2015
Few days back, in a day Sensex dropped 723-point, or 2.63% to its lowest point this year. It is not entirely unexpected. But the market has been losing its fizz over 10-12 weeks. Some experts feel Modi’s government has not delivered what it talked. Recent Jim Rogers interview is much talked about subject in investment circle currently.
The new government is facing difficulty and the several corporate earnings haven’t met market expectation. Recently major IT companies like Infosys, TCS failed to meet earnings expectation and stock prices got beaten. These companies stock prices have major impact in Sensex index level.
Further government is creating its own problems. MAT tax issues does not go very well with Foreign Institutional Investor (FII) and they are increasingly becoming net sellers in the market now. Land bill, GST bill are facing hurdles. Typical short minded indian politicians are holding this nation for ransom. We can’t fault opposition parties like Congress not helping BJP to pass these bills. The bills originally introduced by UPA government did not go through major changes anyway. When BJP was in opposition they did not help to pass these bills. Now they have no moral rights to blame Congress party.
How do we expect such sickening petty politics to impress foreigners when we ourselves feels frustrated and angry ?
There are reports suggesting the money is taken away from Indian markets by FII to invest in new IPO offerings in China. increasingly showing up in the market’s dips. Indian equities are the worst performing major market this year so far and China is the best market. Refer to this chart.
We also notice a great correlation of INR depreciation and Sensex going down. This is nothing new. In the same way, when sensex goes up quickly we also see INR appreciation. This helps to prove the theory that Sensex is influenced by FII purchases only and when FII bring the money in, the INR value goes up. In the same way, when they sell stocks and pull the money out, the sensex goes down and also INR value.
Look at how close these two graphs look alike. Chart 1 is Sensex level for last 3 months. Chart 2 is INR Vs USD chart for the same period. Look at the amazing correlation.
There is also another theory that when US bond yields go up, Sensex fall. The reason behind this theory FII are investing in India since the money is cheap in US to borrow. When the cost of funds go up, they don’t want to take undue risk. Also if they can enjoy higher return in USD terms, why risk investing in a third world country ?
Check this chart that backup this theory.
Where does this lead us ?
1) We are still in a better position with BJP government compared to where we were, couple of years back, in dark tunnel without any light. We have now working government at least. But we have enjoyed a good rally for this achievement of throwing UPA out of power and bringing Modi to Delhi. But if we expect to have another fabulous return like we enjoyed last year, the government has to deliver. As a responsible citizens let us put pressure on the opposition parties in the social media and get them to pass all reform bills.
2) INR is over valued now. INR rates are expected to go down still. My guess is we may still get to Rs.67-68/$ before it settles down. If you are planning to bring money from abroad to India and looking for good rate of conversion this is nice opportunity. You can get more INR for $ and you get to buy Indian stocks cheap. You don’t get this double advantage very often. Rarely once in few years time, you get one such advantage position. Make use of it. Don’t try to time the exchange rate conversion. Split the total amount and do it over weeks.
3) FII may be moving money around based on few percentage points here and there. Long term investors should not try to copy them. It is for the speculators interest. Indian stocks are now fairly valued. You must continue to invest in Indian equities using your asset allocation plan and systematic investment plan. Investing regularly every month is very important.
4) RBI has not reduced interest rates beyond 0.5%. China has reduced twice. There is a bubble building in China market. Soon it is going to go through the correction; the same FII will be bringing money in droves to Indian market. We should be fully invested before then.
5) We are bullish about India. But, if you are NRI living abroad or returned to India and maintain a global asset allocation portfolio, continue to maintain the same. Don’t get too much noise distract you. Don’t bring all your money to India and invest in one market. Always maintain the portfolio across asset classes and across countries.
6) Stop investing in real assets like gold and real estate more. Both these asset classes are expected not to do so well in near future. A small exposure in these asset classes will help to diversify portfolio risk. That is about it. Read my earlier blog on real estate troubles.
Market does not reward you for your knowledge on the stock market. It only does reward you for your timely actions. It does not matter if you have no knowledge about stock market.
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