Where are we heading? North or South..
This is the question that every investor is asking. My answer is ‘SOUTH’. I see markets going further down from here. The major reasons for markets going further low are:
- Sub Prime: The mess created by sub prime is deep. What we have seen is just the trailer and the whole movie is yet to be played. As I am writing this particle, few hedge funds from UK have started to report huge losses. I don’t believe with experts who say that Indian markets are insulated from this crisis. Lehman has shut down its sub prime unit and has shown ‘pink slip’ to 1200 staff members. We are living in an era of global economy and we ought to face the contagion affects of sub prime mess. Credit Default Swaps (CDS) of Indian companies are trading at all time high. For the starters, high CDS indicates more risk of companies not obliging their debt. I foresee see a severe credit crunch which will put on hold Indian Inc’s capex, since they are heavily dependent on ECB’s and FCCB’s.
- Yen Carry Trade: Appreciating ‘Yen’ is causing jitters among investors. If it is followed by interest rate hike by Japanese Reserve Bank then you can see lot of yen unwinding and because of this there will be further selling pressure.
- Political Uncertainty in India: The whole ‘Infrastructure’ story will get spooked, if Manmohan Singh as to go home. The LnT’s, BHEL’s etc will loss lot of steam.
- Chinese Bubble: The CSI 300 index in China has given a whopping 144% returns this year and these returns are on top of more than 100% returns provided last year. In China, the stock market hype is such that common men are betting their life time savings on stock market. I wish I was in China. But is this kind of gravity defying returns sustainable? No, not at all. This bubble has to burst and will affect Indian markets too. Chinese inflation rate is hovering around 7.02% and its central bank has already hiked the interest rates 4 times this year. For me this news is on par with sub prime mess but surprisingly it is very low profile news in media.
Let’s do certain stock specific analysis to justify bearishness:
- TCS: India’s largest IT company. It has been consistently in news, be it in the race to acquire Prudential’s IT assets worth $ 1.5 billion or for getting multi million dollar deals. During good times the constant news flow would have been sufficient for bulls to push up the stock price but on the contrary the stock is falling daily and breaking support levels consistently. The stock has been having free fall and bears are laughing all the way to banks. No bull wants to counter them. In spite of rupee appreciation, TCS has produced excellent Q1 numbers. Revenue growth of 30% (YoY) and PAT growth of 40% is not a child’s play.
- Praj Industries: Praj is leading provider of technology and equipment for ethanol production. One of the favourite stocks of green investors. Crude is trading at more than $70 per barrel. The hunt for alternate energy source is at peak. In Q1 of FY 07 -08, Praj delivered revenue growth of 70% (YoY) and PAT growth of 200% (YoY). This stock has all the ingredients of being a multi- bagger, but on the contrary in past 2 months its market cap has been eroded by 40%. This can happen only during bearish times.
- Blackstone: One of the top PE players of the world. In the bull market, PE players are the poster boys of wealth creation. Recently Blackstone got listing at NYSE at the issue price of $31 and almost everyone was expecting good listing gains. But now it is languishing at $24, a discount of 25% to its issue price. This clearly indicates that difficult time has arrived and days of easy money are over.
If there is any rally from this point onwards, then use it as exit rally. Use the rallies to exit your positions. The strategy should be to minimize the losses and don’t think of maximizing the gains. Start preparing shopping list and while doing so take care of interest rate scenario, forex fluctuations and political uncertainty.
