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.