Spoiled party? Make amends! ~ By Sharmila Joshi

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For the first time in three months Nifty closed below the 5000 level on 8th May2012.  From the disastrous sell-off in December 2011 that had taken Nifty to 4555, 2012 has been a better year.  Indian markets found favor among Foreign Institutional Investors (FIIs).  The risk-on trade  meant that as FII’s were sanguine about the developments in their own geographies they were willing to invest money in riskier/ emerging markets, India too got its share of this inflow and we saw FII’s being buyers to the tune of eleven thousand crores in January and a huge figure of twenty five thousand crores in February when Nifty made a high of 5621.

So what spoiled the party for us?  And where do we go from here?

While at the heart of all the trouble lies with what is happening domestically.  The lack of policy action has caused lot of despondency in those who follow the India story.  The expected FDI in multi-brand retail fell through, the FDI in aviation is as of now still to come.  And we haven’t even begun to talk of what ails the power sector.

The hike in petrol and diesel rates was also put on hold and diesel getting deregulated does not look likely in the near future.

By the time budget day rolled by the overall enthusiasm was on a low, the announcement of GAAR (General Anti-Avoidance Rules) led to increasing discomfort and uncertainty among FII’s and we saw liquidity begin to dry up and come down to seven thousand odd crores much lower than the February number of twenty five thousand crores, and in April this became a negative meager five hundred sixty eight crores showing how volumes had dried up.

Not even the announcement of a repo rate cut in March by 50 basis points to 8% from 8.5% could bring in the cheer.  Adding to our woes was the way the rupee behaved – on 9th May 2012 it hit an uncomfortable level of 53.83 triggering worries that it was headed to 57 against the dollar.  RBI announced the release of 50% of the funds held EEFC Accounts (Exchange Earner’s Foreign Currency), this will mean about $2.5 billion dollars and this should help the rupee recover a bit.  It also signals that RBI will be actively looking at what else they can do to curb currency weakening situation.

Europe is going through its own turmoil, from US there are mixed cues from the data points that have led market followers to believe that the recovery is not a done deal and we are still some months away from it.
Some things are beginning to look better.  While the market may have disregarded the interest rate cut this is a positive and its effect will be felt over the next couple of quarters as this starts showing up in the interest rate sensitive play – banking, autos, infra, real estate and capital goods.  And any betterment in this will certainly bring back investor interest.

Crude is also cooling off, Brent had gone to $128 in February but this has seen it come down to $112 in May – the hike in Brent was negating the drop we had seen in inflation but now that it is on a downward move this too will be a positive.

GAAR has been deferred by a year.  Also several contentious issues in it will be addressed is what we have been promised.  Hopefully this will soothe nerves and when we see a resumption of the risk-on trade India will get its fair share of flows.

We believe that market draw downs should be used to build a portfolio.  A lot of price erosion has happened in the past year or so especially in the Banking space and the Infrastructure sector.  Given that we have just seen an interest rate cut RBI has signaled that they acknowledge that growth too is important and that inflation is under control.  The very high Current Account Deficit is however a limiting factor, it therefore remains to be seen what moves will be taken to jump start infrastructure projects and growth.   But valuations are now at level where we can start making a basket of stocks and buy these at dips so that we get a good portfolio at good prices too!

Company

CMP

Target

% Chg

ICICI BANK LTD

814.2

1130

28%

BOB

641.1

960

33%

Federal Bank

409.9

510

20%

Syndicate Bank

90.8

144

37%

Karur Vyasa

394.3

455

13%

IL&FS Transportation

169.4

220

23%

Sadbhav Engineering

134.1

170

21%

Average

25.00%

(prices as of 10th May 2012)

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