The past few months have been action packed for the markets.
There is optimism and increased risk-appetite as reflected in the all-time highs
of both the Sensex & Nifty. The resounding mandate given to the new Government
has brought back confidence and there is a general belief that the country
should get back on track. Stock market indices are making headlines and there is
increased retail interest in the market (albeit still very small participation
levels). However, we would advice a healthy dose of skepticism, especially when
the over-all mood has turned so positively bullish.
This is not to say that the equity markets cannot/ will not
move higher. There is a good chance of the same given the over-all positive
outlook. Market valuations are about future perceptions after-all (with reality
kicking in only much later!). We would still recommend an allocation to
equities. However, investors should maintain their risk-profiles and allocate
only within the same. Valuations have stretched beyond all-time averages and
the investor should keep this in mind while allocating to equities.
Technically the market is in a strong bull rally. The
indices are all in the bull zone. The Simple Moving Day Averages are all
comfortably in the ascendant order. We have been riding the upper end of the
Bollinger band for some time now. The median Bollinger is at 6935 for the Nifty
which is some distance from where the index presently is. Technically we should
expect some sort of consolidation. But, with the market momentum and the political
stories playing out it will be difficult to predict the short term.
The momentum indicators are also in the over-bought zone. It
is difficult to see a correction with the macro story as it is. What we should
expect is some sort of consolidation in the markets going forward. It will be
interesting to watch the derivatives expiry for the month on Thursday as it
will give us an indication as to which side the big money is betting on.
On to fundamentals now- the political risk in the market has
obviously reduced. On other factors not much has changed and one will need to
wait & watch as what to policy measures are actually announced and
implemented.
It is still early days to predict which sectors will do
well. Many investors & Wealth Managers seem to be trying to pick out the sectors
that will give them “Alpha” in their portfolio (Sector investing seems to be
the flavor right now!). Investors & advisors should understand that playing
sectors is a technical call and the timing of entry and exit needs to be spot
on to generate Alpha. We will generally
avoid taking technical calls as we find we are not the experts in timing the
market. Our advice themes will continue to be broad and macro.
In debt- we expect that the interest rates will continue to
remain elevated. The RBI will be closely watching the onset of the monsoon. The
new governor has clearly indicated that his primary concern is fighting
inflation. With the supply-side bottle necks in the economy it will be
difficult to reduce rates in a jiffy. What we should expect is rates to remain
as they are for the next 6-12 months with a 50 basis points swing on either
side. Investors with the risk appetite could look to add duration in their
portfolios. With strong FII inflows the RBI will not need to keep rates high to
attract capital. The upside risk from here on (as per broad macro plays) is
therefore restricted. Crude oil has also largely been stable at around $110 to
the barrel and should not give the RBI any worries in the near term.
Gold has definitely lost its sheen with this writer
wondering if he should continue covering the metal in his updates. We believe
that it is important to keep track of the metal as it is an important indicator
of the health of the global economy. The metal seems to have found some support
at the $1150-$1200 range in the international markets. In India gold seems to
be trading at close to Rs 28,500 for 10 gms. We expect that it will remain at
around these levels for the short-medium term.
The dollar has been weakening to the Indian rupee. The RBI
is expected to buy dollars at 58. We should see the Rupee settle in the region 58-59
for the short to medium term.
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