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Turning Tides

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The Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) rebounded this week to end with a gain of 1.6 per cent at 15738.7. The rally in the US and European markets also brought some festive cheer across Asian markets including India ahead of Christmas. The market gained after last week's sharp fall following bargain hunting by players that picked stocks at lower levels. News of food inflation slipping to a near four-year low at 1.81 per cent boosted marketmen's confidence as did reports that the government was looking at all options to attract foreign capital inflows. An upbeat report on the US housing market, coupled with an encouraging reading on German business sentiment and a well-received Spanish bond auction triggered the spike in risky assets, contributing to positive sentiment in the market.

Though most of the Asian and global markets will be closed ahead of the new year, the Indian market could open positive on Monday following more than expected new homes sales in the US. On Friday, after the Indian market closed, US reported its sales of new homes. For the month of November, new homes sales rose to a seven-month high of 3.15 lakh, up 1.6 per cent, adding evidence of stabilization in the housing market. The news also helped lift the US market on Friday with the Dow Jones Industrial Average closing one per cent to close at 12,294.

Next week, all eyes will on the Indian parliament. The Winter Session of parliament has been extended till December 29, 2011 to discuss crucial bills such as Lokpal bill, the whistleblower bill and judicial accountability bill. Any positive news from the government will act as a trigger for the Indian market.

The Indian market can be expected to remain volatile ahead of the future & option expiry on Thursday on 29 December 2011. On the same day, the weekly inflation data will be reported in India, while the US will announce its initial jobless claim data. On Friday, the Indian government will also come out with the current account balance for third quarter.

Any positive in the parliament would send the right signals to the market and investors — particularly foreign institutional investors (FIIs) — that the government is serious about reforms. So far the government has been struggling to pass crucial bills in parliament amid stiff resistance from Opposition and allies alike. Rising fiscal deficit has also added to the long list of concerns. In an environment of high inflation, the new food bill is expected to add a further burden of Rs 2 lakh crore per year to the exchequer. But even without the addition of Rs 2 lakh crore in food subsidies, the fiscal deficit at the end of FY12 is estimated to be at 5.6-5.7 per cent of the total GDP, compared to the government's earlier estimate of 4.6 per cent. If the food subsidy burden is considered for this year, than the fiscal deficit of India goes up to 7.5-7.7 per cent of GDP.

All eyes are on the upcoming Uttar Pradesh elections and the union budget next year. One has to see whether the government gathers enough courage to implement important economic reforms.

This week had started on a weak note following all-round pessimism among marketmen that pulled the Sensex down to its 28-month low on Tuesday. The market in the first two days of trade fell by 2 per cent with the Sensex touching a low of 15,135.86 in intra-day trades on Tuesday. However, it bounced back on Wednesday on reports that the government is looking at all options to attract foreign capital inflows. The finance ministry official said India can expect robust inflows of funds from FIIs in the long term and that current foreign fund outflows from India are temporary. Food inflation easing sharply to a near four-year low also raised hopes that easing inflation may prompt the Reserve Bank of India (RBI) to cut interest rates to revive sagging economic growth. During the week, the Sensex touched an intra-day high of 15,911.23 on Friday, before profit booking at higher levels pulled the index. But it still managed to end the week higher than last week at 15,738.7, up 247.35 points.

It's not a runaway market as uncertainties surrounding the market aren't going away anywhere soon. Though liquidity easing in the Euro-zone and US may see some money coming to emerging market like India in the coming months, it will only be the developmental reform that will help our markets move upwards and that today seems to be in a limbo. Until India specific issues aren't adressed, particularly regarding opening of investment windows, equity can't be expected to witness a clear upsurge. But the triggers that the market is looking for would be clear signs that inflation is on the wane, signs of recovery in capital spending and consumer demand and third that the government has the resolve to see through critical reforms. Any combination of these would go a long way toward convincing investors that the fundamentals justify the type of premium valuation Indian markets have commanded in the last few years.

There is really nothing that has changed today or in the last one year. What has changed is the perception among people. Experts feel this market is an absolute buying opportunity, and from a FII standpoint with rupee at 52 it's like picking stocks at a Nifty of 4000 levels. The reason for such confidence about the Indian market is due to the expectation of a strong corporate performance. Despite the dismal September ended quarterly performance as well as expectation that quarterly performance for the period ending December 2011 will be the worst in FY12, the expected earnings (EPS) for the Sensex for FY12, even after revising, is around Rs 1,131. This means the Sensex today at a forward price-to-earnings (P/E) ratio is trading close to 14 times. While for FY2013, on an estimated EPS growth of Rs 1277-1300, the Sensex P/E is trading around 12 times.
It's true that today environment is surrounded by pessimism and fear and there is a high probability that the market may get into a panic mood which could further pull down the market. But it is also true – even the best of minds have never always been successful in finding the bottom. Instead of trying to guess or identify the point of maximum uncertainty, investors should start picking up frontline blue-chip stocks. When the tide turns these will be the first to rebound.

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