Saturday, June 26, 2010

Rising Support for Yuan as a Reserve Currency

CHINA VS. INDIA

More than one year ago, I had written on this blog regarding the global ambitions of China; in particular its push to get Yuan accepted as international reserve currency (Of Triffin's Dilemma and China's Ambition , April 6, 2009). Since then, things have moved slowly, but almost surely in favor of this move. The latest voice to be added to this growing 'movement' is that of Asian Development Bank, which released a report this Thursday suggesting Yuan 'has the potential' to become an alternative to the US dollar (Yuan can become alternative reserve currency to US dollar-ADB).

At this point, it is not known how long it will take for the Yuan to "internationalize". That is irrelevant. What matters is the reality of China becoming more and more important in the international financial system and its implications.

China has emerged as a stabilizing force over past 18 months in the aftermath of the global financial crisis. It has done favors and most likely would have been promised rewards in return. Furthermore, China's continued cooperation is important for the world to avoid lurching back into the deep, black hole that was barely missed about 18 months ago. In other words, the timing is just right for the dragon to stake its claim to its rightful place in the world.

That brings us to the next question: what is dragon's rightful place in the world? That question gets answers as diverse as the 'color depth numbers' on the latest LED TV models; right across the spectrum. There are those who just can't stop loving China, staking everything on its economic juggernaut. There are those who just can't help being skeptics. Then there is the newer, emerging view that China is just like Japan in the late '80s; overrated, but just a spent force about to go belly up.

Truth is likely to stranger than all these punts. Punts they are because it is hard to know China despite all those 'research dollars' being thrown at it by consulting firms, investment banks and brokerage houses, trying to make sense of the puzzle that China is. Instead of relying on these 'house views' and 'in-depth studies', it is better to simply look at the growth curve of country and something rather simple: human behavior.

And the human behavior dictates that the internal consumption story in China has not even woken up yet to its full potential. Per capita GDP numbers hide a vast gulf of disparity between China's elite and its have nots. The have nots have kept quiet so far due to the ability of the system to deliver and the system has been delivering. Why should they put their faith in anything else? As soon as their turn comes, an army of consumers will rise. There is nothing to stop them.

There is a historical precedent to it as well. Much to the chagrin of purists, the US of A provides the prime example of an economy in transformation; exactly one hundred years ago. The economy had just been finding its feet after a 50-year growth run with per capita incomes of about $5000 in today's terms (about $1000 higher than today's China, but then you can't be exact about this stuff). What happened after that is anybody's guess. Runaway growth, wild capitalism, rampant bull runs; only to be tempered by a Wall Street crash and global depression twenty years later.

Folks, the dragon has barely begun. More on this later.

Ciao. And apologies for disappearing for so long.

Thursday, April 8, 2010

Why We Need a Stop Loss

TRADING PSYCHOLOGY

My favorite piece from Zen literature.

Master Caotang Qing said:

    The fire that burns a meadow starts from a little flame, the river that erodes a mountain starts drop by drop. A little bit of water can be blocked by a load of earth, but when there is a lot of water it can uproot trees, dislodge boulders and wash away hills. A little bit of fire can be extinguished by a cup of water, but when there is a lot of fire, it burns cities, towns and mountain forests….

When people of old governed their minds, they stopped their thoughts before they came up… Therefore the energy they used was very little while the accomplishment they reaped was very great.

- Zen Lessons, translated by Thomas Cleary, Shambhala Books, Boston

I don't think I can say it any better than the Master said. So I will just shut my trap and let you meditate on it.

Tuesday, April 6, 2010

Confirmation pouring in: We are in the middle of a commodities boom and a dollar flood

GLOBAL ECONOMY; GLOBAL MARKETS

I did not expect confirmation of my yesterday's views so early. Of late, confirmation has generally been arriving pretty soon for what I have been observing. On NIFTY breakthrough (Violent and Brief), it took the market barely one day to cross the long held resistance.

There is sporadic evidence emerging for the hypotheses I proposed yesterday (Recovery : Final Confirmation, Twin Deficits and Rising Inflation). Broadly, my argument is on the following lines.

  • Recovery in the West has been underway for some time and now we are seeing final confirmation of the same.
  • At the same time, this confirmation is of little use, mainly because what brought the recovery is going to be a massive drag from here on.
  • The large US budget deficit is also going to create a massive trade deficit. This means:
    • Higher purchases of US treasuries by foreign governments; this will fail to absorb the entire trade deficit.
    • Additional dollar supply flooding the market; since there is no penalty for the US for letting the world slosh in its money. Exactly one year ago, I was ranting about the same thing and why China and even EU want piece of the action (Of Triffin's Dilemma and China's Ambition). It is funny how an old rant can seem new sometimes.
    • Commodities on fire; the dollar flood is going to simply push commodity prices out of the stratosphere.

A cursory glance at Bloomberg page today brings the following news.

Rise in Treasury Yields Slowed as Currency Reserves Grow Fastest Since '08

Oil Surges to 17-Month High on Signs of U.S. Economic Growth

Copper Advances to Highest Level Since August 2008 on Recovery

Financial journalism tends to put a spin on everything. Right now the spin is 'recovery'. Well, there is another explanation that is far simpler; dollar flood. And then there is the Euro flood that is almost as big. And then, there is the Pound flood that is the biggest of all in relative terms (just measure the relative sizes of the budget deficits to the economies). The "gainers" of this not-so-hard earned money, on the other side, are also easy to identify. Export powerhouses like China (who incidentally refuses to let the currency appreciate) and commodity dependent economies. Japanese yen is around 93 (you can bet the Japanese are not very happy about it but will keep quiet because it will rise to probably sub-80 levels if they let it go free), Australian dollar is heading towards parity again and Brazilian Real is at 1.76. The evidence is all over the place.

To avoid confirmation bias, am still looking for that one bit of contradicting news which can disprove the hypotheses. If you come across something, please do throw it in.

Monday, April 5, 2010

Recovery : Final Confirmation, Twin Deficits and Rising Inflation

INDIAN MARKETS; GLOBAL MARKETS

Much has been made of the recent job growth numbers out of the US. They are a very positive sign of course. But what does it augur from markets' point of view?

Not very much, not at least from the US markets' perspective. Here is why. In any typical recovery, most of the indicators start registering a positive long before growth starts showing up in job numbers. As an indicator, growth in jobs is probably the one that lags the farthest behind. The reason is not difficult to see, no matter how rosy the outlook starts becoming, you will always want to check twice before you add those extra workers to your payroll. If you have any doubt, you will most likely opt for paying overtime or other such temporary measure.

Hence, the value of the indicator is in confirming that a recovery has actually taken place. Yes, it makes not a very convincing confirmation since the number has been positive only twice. But if you are waiting for further confirmation, you are already way behind the curve.

It does not augur necessarily well for the US stock markets. Much of the move has already happened and there are major challenges going forward. The toxic assets that caused the problem in the first place are still stuck somewhere in the system. The large stimulus, even though it drove the recovery, is going to be a major drag in the form of fiscal deficit in the US.

For emerging markets, there are many positives though, particularly for India. India came out of the shock with relatively little 'stimulus' and whatever has been provided has been rolled back. Fiscal position is looking good. Hence, the growth is solid. Furthermore, even financing crunch (due to lack of liquidity) is likely to ease, as explained below. All looks well for Indian market, except that inflation is going to be a complete pain.

Rising liquidity

Huge budget deficit in the US is going to drive a huge trade deficit too (they are two sides of an equation, no matter how much hot air US policy makers blow, there is no way you can eliminate one without eliminating the other). Which means the world is going to get inundated in dollars too. Whether you like it or not, a dollar flood with continuously falling interest rates is inevitable over next one year. Some of it will go back to the US as Central Banks buy US treasuries, some of it will simply be funded by excess money supply. Such is the prerogative of those supplying the reserve currency of the world.


Commodities again

No turning back the commodity inflation cycle from here. Once again, the rollicking days of ever rising commodity prices are here. That is likely to be the situation for next one year. If you bought some of those metal stocks here when they were going cheap, you are going to be rich pretty soon! Jokes apart, we are looking at a repeat of the late '70s here, nothing less.

Friday, April 2, 2010

Violent and Brief

INDIAN MARKET

So we did have a dip from the 5300 levels afterall (Waiting for the Breakthrough) on the NIFTY. Nothing very surprising there. The market has bounced back from its minor correction (if you want to call it that). We are back on the gates of the 'zone de résistance' and things might get stuck here again.

Or they might not. I do not know whether the bearish side of the market has had its fill of adventure or not. If not, we will see another skirmish. But at some stage (possibly in this very move), the zone is likely to be overrun.

And it is likely to be overrun in a big way. This is not the first time that this level is working as a major resistance. Post the Lehman dip, this level has alwathings might get stuck here again.

Or they might not. I do not know whether the bearish side of the market has had its fill of adventure or not. If not, we will see another skirmish. But at some stage (possibly in this very move), the zone is likely to be overrun.

And it is likely to be overrun in a big way. This is not the first time that this level is working as a major resistance. Post the Lehman dip, this level has always held. It was not broken during the post election rally, held out once again against medium term trend and is proving tough to breach for the medium term trend move.

The strong resistance means that a break is likely to be fairly forceful and swift when it happens. There is a lot of pressure built up that is likely to be released when the breach comes. All the doubtful bulls sitting on the sidelines will jump in at the sight of a convincing breach and that will make the move quite sudden.

For those salivating at the thought of making a quick buck in the move, here is a sobering thought. Given that a large chunk of the market is now dominated by robo-trades, there is no way exact timing of the move can be predicted. Going aggressively long has its risks, as you can get caught in the 'sucker bet' downmove generated by automatic algorithms. At the same time, there is no telling when the market may make a sudden breakout. In all likelihood, it is going to be a very violent affair, and a very brief one. Given the nature of trading in the market, it may be over before you can say "gotcha!!!"

Thursday, April 1, 2010

A Questioning Mind

TRADING PSYCHOLOGY

Yesterday's piece cited one recent piece of research that insists there are specific 'centers' in the brain that control temptation. Also, 'stimulating' those centers somehow seemed to alter the level of temptation subjects could bear. Does it mean we should snap electrodes to our heads to stimulate our brains before sitting down in front of the trading screens?

The answer to that brings us to another important trait that makes a successful trader, a questioning mind. On the face of it, the research seems innocuous and straight forward. But it might not be. There are too many give-aways. The first one is the intent to produce a 'drug' that can help you control temptation. I won't even get into the ethics of doing this. The other is the fact that there could be a much simpler explanation for the phenomenon observed. We all know (thanks to a movement that took this principle to the height of stupidity) that the right side of the pre-frontal cortex processes information holistically while the left side processes sequentially. So it is not hard to imagine that stimulating the 'holistic' side will help you thwart temptation while working the sequential, 'next step only' side will drive you right into its clutches.

This is too simplistic, of course. As simplistic as the right-brain left-brain movement, which incidentally made the assumption that 'using your right brain' was a simple matter of shutting down half of your brain (a truly "half-brained" approach). Let us not even get there. But the moot point is that you can avoid questioning 'given wisdom' only at your own peril.

The same applies to investing also. "Very well known" you would say, "tell us something new". Well, the new thing is that 'cultivating the questioning mind' is something different from what it is made out to be. What does not matter is how many questions you raise, because simply raising questions is not enough. What matters is what questions you are asking and what you are willing to accept as an answer.

The importance of asking the right questions and framing has been explored long ago by behavioural finance pioneers Tversky and Kahnemann. Those who are interested in the area would enjoy their brilliant work and how ingeniously they separated the motivations at work layer by layer. In most of the cases, path breaking conclusions look extremely simple in hindsight, though getting to those solutions to begin with might have been extremely hard (due to orthodoxy, 'given wisdom', etc.). The beauty of their work is that most of what they say is so counterintuitive that even today it never fails to startle. To come up with answers that are counterintuitive yet startlingly true, not only against the 'given wisdom' of the time, but still amaze three decades later requires a rare quality. A truly questioning mind.

More will follow.

Wednesday, March 31, 2010

Hard Wired Traders?

TRADING PSYCHOLOGY

There is some good news on the trading horizon. At last, you have a way to literally shock your brain into doing the right thing. All traders have known for ages what the right thing is; take your losses, sit on your profits, so on and so forth; but succumb to temptation.

New research indicates that "maturity" (or lack thereof) of the pre-frontal cortex is to blame for people falling to temptation (try this Yahoo link for the full story). This has fairly strong implications for people who want to become active traders or investors. It is no longer a matter of following some standard advice on 'taking your losses'. It boils down to whether you are wired or not for taking the high pressure situations this profession puts you into.

Ability to delay gratification or to withstand temptation is a core measure of maturity of a person. The trait is valuable across the board. It is the best predictor of future success at an early age. It can determine whether you live a healthy, well adjusted life or will indulge in self-destructive behavior. It is at the heart of decisions like whether to get up early in the morning to exercise, give up that next drink so that you can drive home safely or give up the dessert after dinner despite being presented with truly sinful but delicious option. It also has implications like whether you will diligently plan your finances or will run budget-busting credit card bills. But nowhere is this more visible than in investing and financial markets.

Trading and investing (I do not necessarily differentiate between the two, it is just the time horizon that separates a trade from an investment) definitely requires an ability to give up short term pleasure, even bear extreme pain (remember the last stop-loss that you took?) for long term gain. From start to finish, trading is all about sticking to the discipline of doing the right thing.

This advice has sounded very easy to follow. But real world stands testimony to how difficult it is to practice. Barely 1% of traders are profitable in the long run. The usual explanation for this has been 'trading talent', but it has remained elusive what this talent is all about. How do you differentiate who will be a good trader and who will wilt under the temptation of letting that loss-making trade run just a little bit longer in hope of salvaging something?

Surely, trading involves a lot more than just brutally enforcing your stop losses. It requires diligent research, a sharp and keen mind and a great run of luck. Still, some of us could use just a little bit more of that discipline to make the difference.

So where does this lead us? Shall we all wrap electrodes around our heads and start "stimulating" the correct regions of the brain? May be not so fast. More on that later.

Tuesday, March 30, 2010

A Strong Sense of Entitlement, or Something Else?

TRADING PSYCHOLOGY

Last week, there were two very interesting headlines Times of India's Delhi Edition had on its front page (of course, hidden behind the annoying half page of advertisement that simply kills the pleasure of picking up a paper in the morning). The first one was on the fire in a building in Kolkata. The story writer ranted on 'unapproved additions to the building', lack of safety norms and so on. The conclusion was that the civic authorities had failed completely in their duty.

This is not interesting on its own. The interesting part was the second story. Again, the writer ranted on cancellation of day one of fashion week in Delhi. The arguments were on the lines of authorities having been informed sufficiently in advance, people waiting in queue, authorities not getting their act together, etc. Buried somewhere in the story was the fact that the organizers were not able to meet all safety guidelines and that delayed approval.

So there you are. As a society, we are heading to a situation where we cannot tolerate even a minor disruption of what we want to have. We want our gratification, right away. Somebody else owes it to us and we will shamelessly lash out even when we are at fault for delay.

That attitude kills an investor or a trader more than anything else. In this game, there is nothing worse than getting into the ring (figuratively, now that everything is electronic) with a strong sense that the market owes it to you. Even a small dose of this poison can do irreparable harm to portfolios carefully nurtured over long periods of time.

For a trader, it is even more dangerous. You cannot blame market analysts, policy makers, the government, media or anyone for anything. The trader has to take responsibility for all that happens to her position. The trader cannot blame even the tools, so what if a tested technical pattern did not hold out on a particular day and you lose money? The market does not owe you anything, nor do Mr. Head and Shoulder, Mr. Double Bottom or Ms. Third Wave.

Why am I writing all this? Because after years of reminding ourselves over and over again, there still is a day when the stop losses get hit and we just cannot help cursing that analyst whose 'advice' provided that extra bit of justification needed for putting on a trade. You can laugh at them, berate them or otherwise disagree; but you cannot blame them. The blame lies squarely with you, the Trader.

Monday, March 29, 2010

Waiting for the Breakthrough

INDIAN MARKETS

The market is stuck at a strong barrier, the strong resistance of getting past a previous high in the recent past. The general prediction in the market seems to be that the resistance is too strong and this is the time to take profits. Is it really?

Let us consider the pure momentum argument. This market has had a lot thrown at it over past one month. High inflation in India, tightening stance by RBI, possibly higher interest rates, international risks (e.g., possible Greek meltdown) and so on. The result? The market barely blinked.

On top of that, we have had a sizeable portion of the market yelling that the market is ripe for a break and it is time to take profits. Still, the market has refused to break down.

Instead, the market has spent considerable time getting consolidated in each "resistance" range. And then breakouts have happened, very quick movement and then you get stuck again at the next "resistance".

All this means only one thing, the "resistance" is the last stand of the bearish crowd who have made tons of money in the past taking similar positions and are waiting for another repeat of the "same old thing".

I do not know whether this "repeat" will happen or the market will break through this time. I am completely agnostic to either. But given the strong amount of resistance at the moment, any break from here is going to probably pause only once (may be 5500?) before the last barrier is broken and the floodgates open. Once that happens, this market might not stop before revisiting its all time highs. Who knows?

Friday, March 12, 2010

Who is right?

GLOBAL MARKETS; INDIAN MARKETS

Globally, things are in a flux. There seems to be some consensus that the economy is on the path to recovery. Still, global economy is going through a lackluster phase and the net data flow is neutral at best. This is perhaps the best time to observe what predictions people make and how those predictions pan out (and most of them will end up doing something pretty "rude" to themselves, that is an almost foregone conclusion).

As usual, when things are finely balanced, opinion gets split in the middle. With one half seeing catastrophe ahead and the other seeing recovery, where does the market end up? The most likely answer is 'nowhere'. Performance gets lackluster and things do not look like moving. Rangebound movement is usually the result and whipsaw is frequent. But what is the prognosis?

For a trader, the best thing to do is to admit that no one knows a damn thing about the future at such a juncture. That includes the trader himself/herself. It is like driving blindfolded and is probably the most interesting (though very bank-balance destroying) trading experience.

Some things can work. Including running very tight stop losses and trading ranges. Some things cannot, as this is the worst possible time for trend followers. As the trend in the global market will take some time to emerge, there is some time for money for trend followers to show up.

The implications for Indian market are clear. Any sustained upmove in the interim period is going to be amplified by global funds as people chase higher returns. Also to be expected is a higher churn as money moves due to the shifting sectoral share in growth. While currently the Indian market is also very dull, this clarity will start dawning sooner rather than later and an amplified move can be seen emerging any time over next month or month and a half.

Good time for people who believe in accumulating stock slowly and make good money in a sustained upmove.

But keep one thing in mind; no one knows.

Thursday, March 11, 2010

What not to touch in the markets?

INDIAN MARKETS

While the market has started moving in a direction that looks more positive, there are several danger signs that need to be watched out for. Also, many sectors in the economy are going to put in a lackluster performance and some are secular laggards over next few years. Here is the list of things that you need to avoid in the coming one year.

  • FMCG. All said and done, where is the growth for the sector? The only answer to that is the rural market. The food component of the business will continue to grow as the economy accelerates but the rest is not likely to grow too fast. How many soaps can you consume in a day? How much extra can you get from the same consumer for the same set of products? What do you do about the low cost competition from the unorganized sector? These are the questions that made FMCG a big underperformer in the previous bull run. Nothing has changed now to make it an outperformer.
  • PSUs. Other than infrastructure and perhaps banking, there isn't any sector where PSUs provide a superior growth story versus the private sector counterparts.
  • IT and BPO. Regardless of what people thought, reality is that a recession in the west is not a dampener for most of outsourcing related work. As firms seek to cut costs, there is countercyclical force in favor of outsourcing based businesses that dampens the effect. Now the situation has changed with anti-outsourcing sentiment as strong as ever, pressure to outsource ebbing and a currency that is strengthening; the attractiveness of the sector would be at an all time low; no matter how many "signature deals" you see. It is no longer a "growth industry". You are looking at a mature industry with moderate growth rates and valuations it deserves are more like FMCG and less like renewable energy.
  • Retail. The model that fueled runaway growth has failed. Period. Like the internet boom of early this decade, the industry is going to be around, just not in the same shape with the same value proposition. Rejigging the model takes time. So watch out for retail's comeback, only not in 2010.
  • Textiles, garments and other also rans. With the policy dice heavily loaded against this sector; little hope of a comeback. A real pity though, this is the sector with highest employment generation potential with just a little amount of training (unlike software that takes years of education). No wonder every developing country has this sector on top priority. But Indians do things just differently…

Avoiding these sectors is important for the health of the portfolio. But a winning strategy takes more than just a list of stocks to buy and to avoid. More on this later.

Monday, March 8, 2010

Time for a Secular Bull Run? Part - III

INDIAN MARKETS

The theme for past one year has been dominated by consumption growth (led by rural demand) and resumption of the commodity cycle. Metals were poised to gain the maximum from this theme. So were two wheelers, telecom and other consumption led sectors.

This part of growth story is not going to be as strong for next two months. The effects of bad monsoon will take some time to clear up. The disposable income delivery by the agri-sector would have happened in 4QFY10. The sector has turned out to be weak and the resulting impact on disposable income will dampen demand from this sector.

At the same time, the changing fundamentals of the economy are likely to kick-in over next 12 months. I want to caution that all the positives we have identified are slow acting and none of them is going to deliver a sharp jump up in the markets. Still, a slightly positive bias is likely to rule for next 12 months.

Which sectors are likely to lead the charge over next 12 months? There are quite a few, which provides very good diversification options to investors and traders alike (though traders will need to trade with a longer time horizon than usual to gain from this).

  • Banking. Favorite whipping boy of the bear runs, will likely get back in the forefront over next 12 months. Several positives, stable interest rates will not steal the wind from bond portfolio sails, rising credit offtake (particularly from housing sector), lower threat of bad loans to name the few. Some banking stocks are a "must own" in any balanced portfolio.
  • Real Estate. Finally out of the woods, the sector is likely to limp back to its footing over next few months. The recent withdrawal of "teaser rates" is actually a vote of confidence in the sector by the anxious bankers. They no longer feel the need to offer sops to borrowers (a "not so important/risky" set of customers) to make sure the riskier and more lucrative set (builders) stay solvent and afloat. Back to the times of rising greed and runaway prices?
  • Capital Goods. Must own over next 12 months. Like it or not, capacity expansion theme is here to stay. Last 18 months have seen capacity expansion disappear as "captains" of industry turned into anxiety–ridden wimps. Now that the scare is over, sooner or later, everyone is going to get the scare on the other side: "we are not poised for growth anymore".
  • Auto: Mildly positive. Caution needs to be exercised, with an eye on next monsoon. If it turns out to be good, two-wheelers will gain only at the fag end as rural income growth comes back.
  • Media: As confidence goes up, the lifeblood of the sector, AdEx, should also start rising.
  • Infrastructure and related (cement, etc.): Make no mistake about it, India is so starved of infrastructure today, any project is likely to make money. One of the best bets if you want safe, assured returns as a big ticket investor. The only question is, can the government get out of the way fast enough?

Along with these sectors, there are some that need to be kept at a distance. A note of caution, since they are not likely to do much over next 12 months does not mean they are easy shorts. Instead, they are more likely to be lackluster, yielding gains to neither bulls nor bears. A detailed look at some of them tomorrow.

Friday, March 5, 2010

Time for a Secular Bull Run? Part - II

INDIAN MARKETS

The consolidation mode markets went into over past few months has hidden a major shift in underlying fundamentals of the economy. A number of things have happened in this period.

  • Fiscal profligacy has come down. All said and done, the government did not fall for unlimited stimulus. I suspect a strong underlying theme would have been food inflation. Whatever the reason, a very wise decision.
  • Economy is recovering, though not out of the woods yet. Still, recovery sans major fiscal stimulus flowing into the economy is impressive and means that the economy can grow from here.
  • Liquidity. Helped in no small part by forex inflows. Government borrowing has also not gone to the level of crowding out everything else. Bond yields, as a result, have stabilized and are likely to either stay there or slowly tick down from there.

There are several negatives also, though it is better to view them as leading a 'shift' rather than pure negatives.

  • Failed monsoon. The impact will linger for some time. For past one year, the economy has grown on the back of a strong rural consumption story (as I continuously pointed out in my posts exactly one year ago) and negative growth in agriculture puts a spanner in that. While things should recover, rural disposable incomes will stay depressed for next six months. That shifts the focus away from consumption theme for next six months.
  • Low capex. A worrying trend has been the low capacity addition in the economy. It means current growth is the result of higher capacity utilization instead of capacity creation. Does not bode well for medium term growth.
  • High interest rates. Will take some time to come down. They are high despite good liquidity in the system and a stable sentiment. Which means any reduction in rates will be based on a slow, gradual reduction in the proportion of governments borrowings in total debt in the market.

The interesting part is that none of this makes for a drastic rise or fall in the stock markets or the fortunes of the economy. Instead, this makes for a slow and steady movement where things improve (or deteriorate) slowly.

This does not do any good to the rampant bull (or bear). At the same time, it makes for a steady secular slightly bullish market in the medium term where interest rates are either stable or slowly ticking down, economy is growing, liquidity is comfortable and consumption gradually improves as agriculture/capital goods sector gets out of the woods and capacity addition resumes.

My last year's picks, metals, auto in general and two-wheelers in particular, telecom, etc., turned out to be exactly the right picks for the market. But the changed market requires a complete reassessment of which sectors to be in. That analysis follows.

Thursday, March 4, 2010

Time for a Secular Bull Run? Part - I

INDIAN MARKETS

We have had an extended sideways trade going on in the Indian stock market for some time. While I did anticipate December and possibly January to be a slow month, the market just continued to be dull for longer than anyone had anticipated. In hindsight, it looks just logical for it to have been like this.

On the surface, it looks like the market was waiting for the budget to come out and the fiscal stance of the government to be clearer. And it also looks like that the budget provided some clarity that has seen the market attempt to break out of the long held trading range.

In reality, the doldrums stem from another factor. It is now clear that the government started the task of fiscal consolidation long before the budget. It shows in the expenditure numbers and fiscal deficit estimates. It probably won't do much good for advocates of "stimulus" who have been clamoring for more. But it does a lot of good for the long term health of the economy.

There lies the bind the market has been in. The economy has been growing all the while when government spending has been in check. Tax level sops will probably continue for some more time to come, but low spending means there is very little "real stimulus" flowing into the economy. So there you are, the recovery is definitely there, though not on a sure footing yet. That would keep the markets from tanking outright. On the other side, there is very little "push" coming from the fiscal side. That would prevent a massive upmove also till the time things stay unclear.

The budget has brought a lot of clarity indeed, from the macro numbers point of view. It is now clear that fiscal deficit is not expanding as rapidly as some of the market participants have been factoring in. With disinvestment proceeds and 3G auction money flowing in, the need for the government borrowing drops drastically in the coming year. The government being committed to an aggressive debt-to-GDP ratio target in the medium term also points to reduced borrowings in the market.

This changes the dynamics underlying the market for a number of reasons. Working out the new market drivers for next one year would be essential for making money in the next one year. A detailed analysis follows in the next post.

 
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