AFTER A DOWNWARD TREND FOR AN YEAR, THE INDIAN STOCK MARKETS ARE AT LAST SHOWING SOME SIGNS OF REVIVAL. HNN HERE TRIES TO TRACK THE UPWARD MOVEMENT AND GAUGE THE MOMENTUM
Gone is the age of buying and forgetting share portfolios. The savvy investing class is looking at making a quick buck even in the current market.
The widely held theory is that the only time to make money in shares is when the market is rising. But, several investors have worked towards dispelling this perception in the recent bear market, armed with improved products and better information that have helped them capture movements either way.
Not many dispute the fact that the scope for making profits is much higher in a bull market than in a downtrend. Still, many nimble-footed investors have chucked the ‘buy and forget’ investment style for the moment in search of some quick gains. Market participants attribute this confidence among such investors to increased possibilities to trade through futures and options.
“People are increasingly adopting specific strategies in derivatives to make money during bear market,” said Gaurav Dua, research head at retail brokerage Sharekhan. “The most common of them is to buy put options and wait for the market to fall. Avid investors also make use of covered calls to
make money,” he added.
Market participants expect a significant build-up in put options over the coming weeks in the run-up to the general election results mid-May. While players are hoping for a coalition led by Congress or BJP to come to power, changing equations in the political circles over the last few weeks have made predictions all the more difficult.
“Historically, markets have been edgy ahead of elections. We think concerns of a hung Parliament could lead to a 15% correction in markets this time,” said Bank of America Merrill Lynch, in a recent report.
“Markets are looking for a stable government that will push through incremental structural reforms after the election. But for now at least, the outcome of the election remains very much in the balance,” Nomura International said in a report. “A poor fiscal situation and a likely weak coalition government at the centre should mean that a major post-election rally is unlikely,” it said.
Amid the confusion over the outcome of elections, investors will also closely watch the March quarter results of Indian companies. Analysts said any sharp decline in earnings could undo all the optimism that has been build-up of late and trigger a sell-off in the market.
Though companies are expected to report a further dip in earnings this quarter, investors are awaiting comments from companies about the broader business outlook. While some domestic economic data has sparked hopes that the worst could be over, analysts are still cautious about concluding that India is back on the growth path.
“While there has been a visible improvement in demand in some domestic sectors, this will not translate into earnings upgrades,” CLSA said in a report.
The ABN AMRO Bank’s purchasing managers’ index (PMI), a key economic barometer based on a survey of 500 companies, rose to 49.50 in March from 47.0 in February. The index had hit a low of 44.4 in December. Nomura does not expect a speedy rebound in the economy’s growth, even though it sees the economy showing ‘nascent signs of bottoming out’ by mid-May.
“A noticeable economic recovery is unlikely until FY11 (year ending March 2011), underpinned by very loose macro policies (at home and abroad), low commodity prices and an easing of the global credit crunch,” it added.
Apart from domestic factors, developments in the global economy and financial markets, mainly the US, will play a significant role in dictating the trend in equities here. Global markets have rallied 20-25% over the last three weeks on the recent move by the US government to clean up the financial sector. The latest step to allow banks more flexibility to value toxic assets, which have forced significant write-downs, has also been cheered by markets. But, market partcipants do not seem to be convinced whether these developments are good enough indications of the worst being over and term the recent upside as a ‘bear-market rally’. “We have not witnessed a significant change in fundamentals, locally or globally to justify such a rally.
It is only a operator-driven rally and many investors would be caught on the wrong foot,” said Ambareesh Baliga, vice president, Karvy Stockbroking. Market participants said investors who managed to buy shares at the year’s low can contemplate booking profits, given that the likelihood of a decline is higher now than before.
“Investors will be able to money if they trade with a shorter time horizon. The idea is to buy at lower levels and sell at 15% to 20% gains,” said Anmol Sekhri, portfolio manager at brokerage Bonanza Portfolio. He thinks that the current level is not the best to buy for the longer them.
Centrum Broking’s senior vice-president, portfolio management services, Mehraboon Irani believes there is scope for investors to make upto 30-40% returns even in this market through short-term trading strategies, without the help of derivatives. “The idea is to buy only high-beta large caps; highrisk investors can buy high beta value - low fundmental stocks while medium risk-taking investors can buy high beta - sound fundamental stocks like ABB, L&T or Tata Steel. Riskaverse investors should only buy stocks with good fundmentals and reasonably good beta levels HDFC or SBI,” Irani said.
Stable govt will see stock rally
If a stable government is formed, the market could gain up to 30% in next six months. But weak coalitions could see roller-coasters ahead
If the stock market performance after the formation of a new government over last few elections is anything to go by, investors can be sure of one thing - if a stable government is formed, the market can gain up to 30% over the next six months. However, if it is again an unstable coalition, then they are in for some more rough rides.
Apart from the masses, the investor community too, has a keen eye on the elections. This is because, the formation of a stable government invariably provides the government more leg-room to take tougher policy decisions, which may be against the interest of some sections, but helps corporate India and in turn, the investors.
An analysis of post-election market trends over the last two decades, the period for which market data is available, provides interesting insights and reaffirms the above hypothesis. On all the three occasion out of the last five elections, when a stable government was formed, the sensex generated positive returns. On the other two occasions, after ’96 and ’98 elections, when there was a crisis of stability, markets have generated negative return of nearly 20%. Out of the three positive occasions, on two occasions, the returns were more than 25%. Interestingly, on both of these occasions, Congress or Congress-led governments were formed at the centre. On the third occasion, it was a marginally positive return of 3%.
The stock market generated a return of nearly 37.6%, after the first election under consideration here. The gain in the first election seems to have been impacted by Harshad Mehta scam. However, a closer look reveals that the real bubble started after the six-month period considered here. While the returns during the first six-month of government formation was still reasonable at 37%, the next three months, when the bubble was really formed, gave a return of nearly 120%!
The two occasions when markets generated negative returns were after ’96 and ’98 elections, when the United Front and BJP led coalition were formed respectively. The second of this was close to important international events, namely the East-Asian currency crisis of 1997-98. However, a closer look reveals that the maximum impact of this was in the second half of 1997, which is before the elections, when markets declined by nearly 25%. In fact, in the two months preceding the election, markets had gained about 20%, which was lost in the subsequent months.
The only election that led to a stable government and still did not generate returns was in ’99 when the BJP led coalition came to power. However, this was also the only election to have been impacted by external factor, namely the bursting of tech bubble in 2000. NASDAQ, the key indicator of the bubble, rallied in the months preceding March 2000 when it peaked and corrected by nearly 40% thereafter. Sensex had a nearly similar run, peaking in Feb’00 with 22% returns and then witnessing a correction.
Another interesting fact that comes out of the analysis is that out of the five occasions, the market has shown a rally/correction only once in the first two months, whereas on all other occasions, it has been a gradual movement over a six-month period. This holds an important lesson for the future - any expectation of short-term gain may be disappointing. Investors may have to hold on for a while, if there are signs of stability and will get a chance to exit if instability persists.
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