Friday, October 16, 2009


Pause before year-end rally

We expect near term correction
Indian markets are entering a seasonally strong quarter. On an average October has been a poor month but markets rally sharply in December. While valuations are looking expensive to us, the bulls argue that they are not yet in a bubble territory. An ideal cocktail of easy liquidity and improving economy/earnings are providing support to the markets. While any meaningful change in the uptrend is unlikely till the global liquidity changes, we expect a near term correction in the market (maybe 7-10%) before the year-end rally, led by:

#1: Markets may sell on “good news on earnings”
While headline profits for Sensex companies should decline by 18%, ex-metals EBIDTA should grow 20% and profits 9.4%. While we think earnings will beat estimates, market expectations are running much higher. We expect markets to sell on “good news”. Secondly, the pace of analyst upgrades is starting to slow down which could be negative for markets.

#2: Cash with domestic MFs at 18-month low
Cash with domestic MFs are at an 18 month low of 8% (down from over 20% in Feb, 2009). These low levels of cash were last seen at the peak of the markets in Jan, 2008. While insurance companies are bigger buyers than MFs, it does indicate that buying from domestics will be lower going forward.

#3: Supply of paper to suck secondary market liquidity
Over next 6 months, we could see $10 bn of primary issuances, largely in infrastructure and real estate sectors. This could cap secondary market performance.

#4: Inflation, interest rates could be worries
We expect headline inflation to show a rapid increase to 6-7% over next 6 months. We also expect RBI to hike interest rates in January.

To see the full report: INVESTMENT STRATEGY