Saturday, September 24, 2011

Global Market Updates / Special Coverage For Indian Bourses - 24th September 2011 - Part2

So we saw that there are a lot of headwinds as far as the developed nations are concerned. Now let us look at what to anticipate on Nifty, Indian stocks and economy moving forward. The rise in dollar index has had such a pressure on the Rupee that the falling prices of commodities do not seem to have any impact on the end price we pay in Indian Rupees. Unfortunately, that will continue to be the case for some more time. As far as gold is concerned, it was in a complex Diagonal Triangle with support at 1450-1500 area and upside at 1925 area making higher lows and lower highs. Currently, it has broken out of this by breaking down below 1725 region but the 1450-1500 zone will continue to act as support IMHO and gold may make one more attempt to take out the 1925 levels and may even spook upto 2k levels in the counter-trend rally but it probably is not worth playing for the swing in gold for the upside momentum. Rather one should see now whether the 1450-1500 zone holds and if we get 3 monthly ticks with High Price below 1450, then it is pretty sure that the upside is done with and the next buy levels would be around 1200 levels only.

Nifty broke the critical support level of 4911-4944 zone. A short-covering rally is pending that may take Nifty to 4944-5032 region but difficult to go beyond that at this point of time IMHO. There may be a lot of shorts entering the system by 4925 levels itself and it continues to be a Sell on Rise market as far as trading is concerned. Now the argument that the high Rollar will boost exports and IT is an absolutely rubbish hypothesis. It holds good only to the extent that all other factors remain unchanged. The major challenge is that there is a fundamental demand slowdown for export related activities (especially in IT/ITES); moreover, with elections around the corner and domestic problems of their own, Europe and North America will start pulling the plug on a lot of projects and will try to boost local jobs wherever possible without too much deviation in the cost-benefit aspects. Moreover, things have changed drastically in emerging markets as well and a lot of unique competitive advantages that the Indian IT companies had a few years ago is not there any more. For instance, as far as costs are concerned, the average per headcount cost out of India, Poland, Chile or Philipinnes is pretty much the same now. Europeans are increasingly showing preference to keep activities in Poland, Czech Republic,  Hungary etc that offer the same time-zone and a far more in-depth understanding of local issues as compared to Indians. US companies are increasingly shifting preferences to countries like Chile that fall in proximity to the time zone and offer much lower costs compared to India.

Last but not the least, the level of imports that we have is tremendous and a weak rupee is severely going to dampen the growth factors for the same. Hence things are not at all hunky dory except for the fact that on a per capita GDP measure, we are almost at the bottom and there is not too much downside remaining. Just as in 2008, so to0 even now, by the time the panic sell is done with [Ideally within the 3800-4200 zone on Nifty in 4 to 6 months time], smart money will recognize that we are still growing by about 6% solely on domestic consumption. Hence, Nifty will be on Buy radar aggressively. Another barometer that is indicating a lot of negative impacts discounted on Nifty is VIX. 35 plus levels and then levels of 38 on India VIX were seen in 2008 when we fell royally from 6357 to 2252 [and closed that day at 2525 - the dreaded 27th/28th Oct 2008] . This time we fell from 5200 levels almost to 4720, staged a counter-trend rally to 5169 and closed at 4940 zone. VIX is already above 35 and when we come to 3800-4200 zones, the VIX will again hit 38 levels and by such times, a lot of the falls will be bought into. This is my personal opinion as far as Nifty is concerned.

Cash as usual remains the king and one can start becoming stock specific and as I always say 'Index' Bees units once Nifty starts going below 4600. Whilst the pending new high did not come in 2011, we should be able to see it by 2014 once we are also done with our elections and this panic bottom buying will provide a very good hedge against inflation as it has the potential to double or triple the investments in a 3 year time frame. Banks as usual will lead from front once the bottom is established followed by automotive, FMCG, Pharmaceuticals.

Invest in companies that have constant revenue flows rather than investing in companies with longer gestation periods. For all my visitors in the IT/ITES section, it is still not too late to diversify skill-sets and keep alternate options ready. The problem this time no as big as 1 Lehman Brothers, it is many similar small clones of Lehman which when added, gives the sum of parts much more than what we saw during the fall of Lehman Brothers. The severance packages that come through maybe good but we have a huge number of job losses coming up in this category.

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