Market Update- 29/7/2014

The markets are going through some short term consolidation. Corporate results for the last quarter have been neutral to positive. The underlying trend still remains positive. We expect to go in to a period of consolidation moving forward. 7900 seems to be a short term resistance and 7500 the short term support. Markets should be playing in this region for the short term provided there are no macro triggers to break the support or resistance.

Fundamentally, the markets are trading slightly higher than their average Price to Earnings. It is a slightly tricky situation for the investor who is looking at past valuations to determine what kind of asset allocation he/she should be looking for at this moment.

Retail participation can also be considered as an indicator of market movements. Retail investors usually enter the markets at the ‘frothy’ stage of bull markets and completely shudder away from the markets at the bottom of a bear rally. The opposite behavior is better for the investor. While retail ‘interest’ in markets has heightened, retail ‘participation’ (in terms of net mutual fund and insurance inflows) still remains miniscule (even negative). The slightly more aggressive investor can look at this and allocate more aggressively towards equities. However, we would advise investors using this approach to keep a reasonable time frame for the same and also be prepared for short term fluctuations. Investors in their accumulation phase should allocate more aggressively towards equities at this point of time.

We continue to see some value in small & mid caps. However, some of these have rallied stupendously in recent months and we would be cautious of over-allocating for the same. Small exposures (in tune with risk-profiles) could be looked at for the more enterprising investors.

Bonds have rallied in the past few weeks on account of the budget, macro indicators (mainly falling inflation) and also moves by the RBI. We, expect that bond prices will continue to move up. The monsoons have picked up and that has also added cheer to the bond markets. The enterprising investor could go a little long in to duration in his/her debt portfolio. New tax rules introduced in the last budget imply that investors in open-ended debt funds will have to be very careful of how they play the markets to use tax laws to the maximum. Investors need to also keep track of their over-all portfolio duration, not getting too aggressive/ defensive on account of the lost tax-arbitrage opportunity.

Recent global issues (such as Ukraine and Palestine) have moved gold prices slightly higher. However, we expect that gold is now at the lower end of its asset cycle and we expect it to remain within this range for a short-medium term. We wouldn't advise investing for pure returns in the asset class at this juncture.