Election results may lift market, but the rally will be short-lived

Election results may lift market, but the rally will be short-lived
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First Published: Mon, May 18 2009. 12 20 AM IST

Updated: Mon, May 18 2009. 12 20 AM IST
Finally, it’s over. Right now, this expression is for the political uncertainties and related issues. Next week, I will start my column with the same expression, and then it would be for the bull run on equity markets. This may surprise you because the statement goes against the general market perception, with people now talking about levels such as 16,000 points for the Sensex as a potential target. Though people aiming so high must have their own reasons for such optimism, I feel that we are in the last leg of a rally that started 10 weeks ago. There will no doubt be be euphoria on the bourses when trading resumes on Monday, given that the settling of the political dust has shored up sentiment as investors had been jittery over the likely outcome of a hung Parliament and the coming together of political parties with diverse ideologies.
But with the ruling alliance having won a near-majority, most investors are happy that there will be a stable government at the Centre that will have more freedom to take bold decisions, subject, of course, to its political will.
However, I do not share the high optimism regarding the stock markets and the economy; in fact, I clearly have the opposite view. Also, I do not understand how the winning of an election by a coalition or political party changes the economic credentials of the country or, for that matter, boosts the prospects of the stock markets. As a matter of fact, it was the same set of people who were blamed for the economic slowdown. I do not mean to talk about the global economic crisis or spike in inflation and so on. My point is that financial mismanagement by the same set of people led to a high fiscal deficit; their excessive borrowing triggered a liquidity crunch in the economy, and untimely decisions led to the deepening of economic problems... The list goes on.
No doubt, there were economic constraints, but the people in charge cannot be said to have handled the crisis in the best possible way, or that there were no better options to manage the economic issues. So, why such optimism now?
If investors think that the formation of the next government would trigger heavy foreign funds inflows, then they may be in for a surprise—foreign fund inflows might actually slow as logically they would now wait for clear-cut guidelines on investment, and for a clearer picture on the status of economic reforms and broader policies.
There would be more stimulus packages, the disinvestment process will restart, a pending decision on the auction of third generation, or 3G, spectrum will be taken, all of which would be welcomed by the stock markets. But there would be many tough decisions also. Let’s not forget that the latest industrial output data for the month of March was way below expectations and showed output contracted by the most in 16 years.. Moreover, exports fell by an unprecedented 33% in March.
The next concern, as far as I am concerned, is the current valuations of the stock market. Given the economic parameters, such as falling gross domestic product growth estimates, industrial and manufacturing data and exports, the current valuation of the market is not very comfortable. Accommodating a rise of a possible 1,000 points of the Sensex would bring the valuations at par with the valuation levels of the last rally, when the Sensex was somewhere close to 16,500 points. This clearly means, going by valuations, that we are already at a level when the Sensex was near 16,500 points, and in the scenario of economic growth visible in the near future, there does not seem to be much scope for higher valuations.
Coming to stock market movements for this week, I think that the market would start off strong, as euphoria would push the markets sharply higher. Moreover, the cascading effect of short covering by investors, who had gone short over the political uncertainty, and higher participation by fence-sitters, would drive the market higher in the initial two days of the week. My studies show that the euphoria would start fizzling out from Wednesday afternoon and then there would be time for heavy profit booking on the bourses, which would then continue for some days to come.
Technically also, the market is near completing its bull run cycle. Though the week would begin on a sound note, profit selling later in the week would cap gains. The Sensex on its way up will now ignore resistance at 12,272 points and would test its first resistance at 12,649 points, which would be a moderate support and may not pose a threat to its rise. However, the next resistance would come at 12,879 points, which would be strong but may not terminate the rally. The termination point for the rally would come at 13,199 points. I expect heavy profit selling to emerge around this level.
The S&P CNX Nifty would test its first major resistance at 3,849 points while the next resistance will be closely followed at 3,881. However, the termination point of the rally would be around 3,930 points as heavy profit selling is likely to emerge around this level.
Among individual stocks, Infosys Technologies Ltd, Sterlite Industries Ltd and HDFC Bank Ltd look good on the charts. Infosys at its last close of Rs1,592.80 has a target of Rs1,638 and a stop-loss of Rs1,564. Sterlite Industries at its last close of Rs460 has a target of Rs484 and a stop-loss of Rs446. And HDFC Bank at its last close of Rs1,184.95 has a target of Rs1,224 and a stop-loss of Rs1,156.
From previous week’s recommendations, Axis Bank Ltd touched a high of Rs692, which was way above its target of Rs627. Grasim Industries Ltd, recommended at Rs1,779.75, touched a high of Rs1,904, which was well above its target of Rs1,822. Jet Airways Ltd touched a high of Rs234.85, but missed its target by a whisker and it continues to be a valid recommendation.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, May 18 2009. 12 20 AM IST