Market View: December 23

Markets have been trading in a range now for more than 2 months, and everytime it tests the barrier at the end of its channel, it reverses back violently. Seems like it would stay within this range for eternity - but then, it appears this way most of times before the final break-out happens. The key question now is not whether the market would break-out, but when.

A lot of participants have lost hope of break-out this calender year, and believe that the next few days would be calm. The implied and realized volatility are both at their 1-year lows. Implieds went below 20 perhaps for the first time this year, and even the US VIX has taken a dip into the sub-20 ocean. Just for the point of comparison, the 20 year average for VIX has been 20, with high of 89, and low of 9. So, we are currently standing at the historical average level of volatility. I think this is a very good time to buy long term volatility (1-year) - just for the comparison, this is how the 1-year realized vols on Nifty has moved:

2001: 26%
2002: 17%
2003: 20%
2004: 29%
2005: 18%
2006: 27%
2007: 26%
2008: 45%
2009: 35%

I'm assuming the volatility next year should be somewhere around 30 (on the conservative side). Remember, most of these years have been bull market period with low volatility, so the current sub-30 volatility is indeed a very good buy.

My view on the markets is again back to bullish - too much of liquidity still waiting on the sidelines, and even though fundamentally valuations have got over-stretched and everything, I think we have steam left to go all the way upto 6000 on Nifty. Banks have become very aggressive on increasing their balance sheet, and this is after a pause of around 2 years. So, am assuming with increased lending, we would see economy coming back to higher growth levels, and corporates having access to easy liquidity in form of debt. All the corporates who have been running a tight leveraged scenario, and have taken a beating, might be the best performers over first half of next year. I think likes of Suzlon, Unitech, DLF, Idea, ICICI and Tata Group would be out-performers.

On the sectroal front, I think Autos have run out of steam as well as good news. Already sitting at the record sales numbers for the past 3 months, I guess its time for some correction. The vehicle sales would continue to surprise over the next 3-4 months, but most of that has already been factored into the current prices. I think market leaders such as Hero Honda and Maruti may be weak from here going forward, whereas Tata Motors may outperform relatively.

Banks would be the big sector next quarter, and whether they are able to take the shock from RBI measures would determine the market direction to a large extent. If the sector cracks (in case of hawkish measures), then we may see weakness in the whole market. However, my feel is that RBI won't be too aggressive in tightening, and we may see record loan growth over the next few quarters. I would go long the banks at the current levels, and review the position after the RBI policy announcements.

On Real Estate, I'm largely bullish, and think there would be huge upside in the sector over the next year. There is a huge pent-up demand, and I think the sector would return back to its glory days of 2006 and 2007. There would a sharp rise in housing activities, as well as trasnsactions happening.

 

Credit Crisis and Banking Bonuses

If last year it were the CEOs of large banks who were on the firing line, this time around its the banking community which is facing the backlash. And the worst part is, its the politicians who are meting out the punishment.

Yesterday, UK passed a special one time tax on 2009 year-end bonuses. This is in addition to the income tax payable by the employee. Somehow, the blame for the whole crisis has passed on to the banks, and more specifically to the bank employees. Which is as good as blaming Vijay Malaya for your the drinking habits of society, or the Casino owners for all the money lost by gamblers. Everyone is supporting the cause of middle-class which has been short-changed by the bankers. However, what everyone is conveniently ignoring is the underlying greed of effectively the whole world. Banks are responsible only to the extent of ‘selling dreams’ – they enabled people to buy houses and maintain lifestyles which they otherwise couldn’t afford. How on earth does one justify every T, D & H in the world buying 1 MM worth of houses?

Banks just earned their cut (which would be 1-2% in the whole transaction). What about all those property developers who sold their apartments at 200-500%  premium to their pre-crisis levels. It is them who made the biggest profit out of this whole mess – and yet, no one is pointing any fingers at them. Banks have been caught napping, just like the rest of the world. And to a large extent, they are in the same boat as everyone – fooled by the crisis, and lost all their equity.

I’m not a supporter of complex financial instruments per se – but somehow I think its not the complexity that took the world down. It was simple plain vanilla naked Greed which caused all this mess.

Market View: December 9

This was to be the year of surprises, and hence, it was apt that the last couple of months were also on a predictable trend – defying all the expectations and market views. There were people who were clamoring for a year-end rally (including myself), and then there were the Bears who thought sanity was just around the corner. However, it was not to be – nothing happened in the last few weeks.

Apart from the shocks of Dubai (where everyone over-reacted, and then quickly forgot all about it), and downgrade of Greece (which almost no one took notice of), nothing has really happened. All the central banks have continued to stand by their expansionary policies, giving their own sets of reasons. Gold crossed over its previous best, only to come down again (though might go up on another round of central bank purchases), and EUR also is getting closer to its highs. There is a high chance that this would be a quite year end – and a small chance of a small correction.

I’m not bullish on the markets anymore, and think the rate hikes would start earlier than most people anticipate. Inflation is going through the roof, and if the government has to even perform lip-service to the poor strata of the society, then they would need to at least try to bring them down. And whatever they may say, inflation is not totally a supply-side problem in India. Give them loans at 7-8% (which is the trend now), and you know that people would buy almost anything. Markets seem to be running out of steam (though this may be the December effect also with lot of money managers on vacation). 

Gold Cross $1200: Way to Go

An interesting milestone was reached today in the markets, and Gold finally broke through the USD 1200 barrier as well. With the Central Banks of China and India standing in queue to buy more and more Gold from IMF, I think this would go a long way up from these levels as well.

I would think even a level of $1500 is possible, and would buy gold at these levels also. Its common knowledge now that most of the reserve rich nations want to diversify out of USD, and in absence of any credible alternative, will stock up Gold for the time being. I think Gold would the thing for the next few years, and may see newer peaks in coming days.