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Proponents of doom exaggerate economic worries, ignore valuations

Proponents of doom exaggerate economic worries, ignore valuations
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First Published: Mon, Jun 16 2008. 01 00 AM IST

A flooded road in Assam’s capital Guwahati. With a healthy monsoon predicted and anti-inflation measures in play, economic activity is expected to pick up in the country (Photo by: Anupam Nath/AP)
A flooded road in Assam’s capital Guwahati. With a healthy monsoon predicted and anti-inflation measures in play, economic activity is expected to pick up in the country (Photo by: Anupam Nath/AP)
Updated: Mon, Jun 16 2008. 01 00 AM IST
In what was a volatile week, equities bounced sharply off their lows after being hammered initially. If you were readers of Ahead of the Ticker, you probably enjoyed the roller coaster ride on the Indian bourses as we predicted both the days and levels that you might see in last week’s column.
A flooded road in Assam’s capital Guwahati. With a healthy monsoon predicted and anti-inflation measures in play, economic activity is expected to pick up in the country (Photo by: Anupam Nath/AP)
While the Bombay Stock Exchange’s Sensex recovered 692 points from its low of 10 June, it is still vulnerable due to surging inflation, which touched a seven-year high of 8.75% for the 12 months ended 31 May.
A fear of inflation has overshadowed the recovery in industrial production reflected in the April data. However, with the latest measures taken by the Reserve Bank of India (RBI) and perhaps more tightening on the way, it seems that the Indian inflation would start peaking in the coming weeks.
But, before that, since the impact of the hike in domestic petroleum product prices is yet to show up, a new spike in inflation is very much on the cards. But, from the stock market’s point of view, this is now well discounted and is reflected in the current valuations.
Vipul Verma
Even globally, negative triggers now seem to be getting discounted. Be it oil or inflation, markets globally have adjusted themselves to the foreseeable negatives.
Unless something dramatic happens—such as oil suddenly topping $160 (Rs6,859) a barrel or the producer price index (PPI) in the US, which is scheduled for release on Tuesday, increases by more than 0.6% (expectations are for a 0.2% rise), or the US Federal Reserve raises interest rates, in which cases globally markets could again go for a tailspin—the markets seem to be coming out of the woods.
Positive trends
Specifically talking about India, my analysis suggests that a positive trend would return soon on bourses and we have left the worst behind. The logic of discounting of negative triggers applies more convincingly to India and thus, there is a case for recovery on Indian bourses now, especially after the deserving correction during last week. On the face of it, this may sound absurd, as a lot of experts on stock markets are gung-ho over the recent bearish phase and are predicting gloom and doom ahead, despite substantial correction in values during the last week.
However, on logical grounds, it seems that the economic worries are stretched and the valuations are ignored, which is giving this false impression of doom. In fact, with slack season ahead for the economy, the demand is likely to slow and with a healthy monsoon so far this season, economic activity is likely to improve. Further more, with timely intervention from RBI, inflation will be contained eventually.
Still, a recovery for the stock market would depend on global factors, which would be put to test this week again with critical data lined up in the US. Any weakness reflected in the US economy would affect the dollar and would, in turn, trigger oil spike.
Key US data
This week, in the US, data related to housing starts for May is scheduled for release on Tuesday. This data is expected to show a marginal drop to 98,000 units compared with the previous month. Any positive data would be a good buying trigger for the US and the global markets. However, since the PPI is also scheduled for release on Tuesday, it is likely to steal the show as it may give leads for the next meeting of the US Federal Reserve, scheduled for 24-25 June.
A moderate rise of 0.2% in core PPI is already factored in. In line or better-than-expected data could trigger a rally on bourses as the fears of hike in interest rates would ease further.
It is worth mentioning here that the Friday’s core CPI (consumer price index) data, which was in line with expectations, triggered a rally on Wall Street on Friday. Another key data related to building permits is also scheduled for Tuesday. Also, the US first quarter current account data will be watched carefully as it may have its impact on the dollar. The current account deficit is likely to increase marginally from $172.9 billion to $173 billion. Following a busy Tuesday, the focus will shift to weekly jobless claims data due on Thursday. Other than economic data, the financial results of Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley will also be under close scrutiny.
These numbers are expected to be poor, due to more write-downs, but, they may also hold the key for banking and financial services stocks, as they would reflect the extent of the ongoing damage due to the mortgage crisis.
Lehman is scheduled to post its second quarter results on Monday. It forecast a quarterly loss of roughly $2.8 billion, its first ever loss. Goldman is scheduled to post its quarterly results on Tuesday. Morgan Stanley’s earnings are due on Wednesday.
This week for India
India does not have anything very critical lined up for this week except weekly inflation data, which is all set to move up again. However, on a purely technical basis, the charts reflect that the market is all set to move up from here on. However, this week would be very crucial for the confirmation of such a trend reversal. If this week, the Sensex closes above 15,596, then the market outlook would change for the next few weeks.
This week, on its way up, the Sensex is likely to find its first resistance at 15,341 points, which is a very crucial resistance level. If the Sensex crosses this level with good volumes, then there would be further gains on bourses, as the next resistance level is likely to come up at 15,628 points.
If the Sensex crosses this hurdle also, then the next resistance level would come up at 15,984 points. A breach of this level would be extremely bullish and would confirm the trend reversal on bourses. Otherwise, a close above 15,596 for the week would be crucial for the judgement of trend for the next week.
On its way down, the index is likely to test support at 15,060 points, following which the next support level would come up at 14,573 points, following which there would be a deciding support at 14,623 points, which, if broken, would be extremely bearish for the market.
Stock picks
This week on our technical radar we have Lanco Infratech Ltd, Reliance Capital Ltd and Praj Industries Ltd.
Lanco Infratech last closed at Rs359.05 a share and has a target of Rs376 and a stop loss of Rs338. Reliance Capital, at its last close of Rs1,130.45 a share, has a target of Rs1,174 and a stop loss at Rs1,102. While Praj, which closed at Rs185.30 a share, has a target of Rs198 and stop loss at Rs171.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome atticker@livemint.com
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First Published: Mon, Jun 16 2008. 01 00 AM IST
More Topics: BSE | Sensex | Valuation | Inflation | RBI |