Sustainability of the Rally

Manu Jain

10^th March 2010

 

Many eyebrows are being raised upon the sustainability of the post budget rally and not for the wrong reasons one must confess. As I write this one, the dollar index is hovering at 80.21 and the rupee trades weak against the Dollar. This is the core concern. To add to that, crude prices are above the $80/bl mark. Is Greece being bailed out? Sure? Think about it in real terms. For who’s bailing out Uncle Sam and by the way what about the oil & gas sector reforms? There are people watching!!! For those who haven’t got a feel let me explain. But wait before you read further ….. make sure you’ve bought some good quality midcaps.

 

The recovery in the US is still not complete what to talk of one in Greece. The problem with the Fed is that they keep on financing their banks on one hand and inject money into the system and on the other trying to convince people that the country’s economy is out of the woods. That is just not how one deal with the long term issues of large current account deficits Mr. Bernanke! We wouldn’t be bothered had we not been dancing to the "Global" cues. But Decouple we will. I am sure, if not today, maybe when the Dollar gets exposed as a non-safe currency of the world.

 

Money, as is well known chases the stronger currencies of the world. Be it the dollar or the Euro for that matter. The dollar topped out at 81 on the dollar index and that is good news for emerging markets. But what bothers me is that there is a commodity bubble forming in the world. Look at crude prices, look at the prices of steel and iron ore. This is not good news for EM’s. For, when the bubble bursts everyone will be buying the Dollar and EM’s will be the first to suffer. Not to say that this is happening anytime soon, it might or might not. If crude prices come down, the dollar index heads southward, Greece gets but not a tough deal on its Bonds, back home the Q4 numbers are good, the Kirit Parikh committee recommendations are implemented (at least partially) and last but not the least inflation tapers off in the second half of FY11 as expected. All this could be music for our markets!!

 

According to an organization in the US, the recovery is 65% due to inventory pile ups. If this is true then FY11 could see de-growth in the United States after an expected 5.1% GDP growth in 2010. Back home the problem of fiscal deficit has been well addressed in the budget. Govt. borrowings have been bought down and what is to be seen is the implementation side of it. But the bond market has not taken the borrowing programme in good stead for the yields are inching up. As I write they have breached the 8 % mark. The reason perhaps is that the borrowings though will not be as high as last year; the absolute amount is still large enough to suck out ample liquidity from the system. But talk to the banks and they will tell you that they really do not see interest rates going up in the medium term. And then as I said, inflation (due to base effect) is expected to come down next FY. The Sensex is trading at 17000+ and as I had explained in one of my previous articles there is good reason for us to command a premium to other emerging markets. The large caps may be richly valued but there still exists a substantial valuation gap between the large, mid and small caps. I say there is still time to buy! And not to forget, HOLD (Fundamentally Good mid and small caps of course). The budget has thrown up ample opportunities for the long term investor. Our honorable finance minister has put in a lot of money into people’s wallets by increasing the tax slabs. In about 0.5% of domestic savings find their way into equities, isn’t it time we increased our asset allocation to equities a bit more. If only it were a bit more I can tell you nifty won’t breach the 4700 mark on the downside!

 

For all those who look forward to my stock recommendations here are a few post budget buys that might make you richer in the days to come:

 

Ø       TTK Prestige

Ø       Thermax

Ø       TIL

Ø       WPIL

Ø       Welspun Gujarat

Ø       Koutons Retail

Ø       Torrent Pharma

Ø       GSK Consumer

Ø       South Indian Bank

Ø       Man Industries

Ø       ARSS Infra

Ø       GEI Industrial

Ø       SE Investments

 

Happy Investing!!

Cheers,

 

Manu Jain

M.com,MBA,DSAPM.

Manujain1232003@yahoo.co.in

 

Disclaimer: I do not hold any of the Stocks mentioned above.