Brace for volatility, but utilise opportunity

March 4, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

After a 21 percent run so far this year due to unabated liquidity flow, markets paused for two weeks in a row with a cut of close to 5 percent. Data showing a slowdown in GDP growth in Q3 December spooked investors while macroeconomic worries arising from high oil prices also weighed on sentiments.

Foreign institutional investors’ (FII) flow continued unabated with $5 bln in February and $7 bln so far this year. Domestic institutional investors continue their selling spree with a net sell figure of $2.4 bln in February and $3.8 bln YTD.

The European Central Bank (ECB) announced 530 bln euros in the second Long-Term Refinancing Operation (LTRO) operation that was marginally higher than expected and compared with a 489 bln euro figure last time. However, there are still fears looming the Greek crisis has still not been resolved and there will eventually be a Euro exit as we have been indicating in the past.

Back home, the 5 percent government stake sale through the ONGC auction route scraped through with Life Insurance Corporation of India (LIC) moving in at the last minute to save the day for the government. There were debates the floor price was on the higher side. As a result, a large number of FIIs and mutual funds did not participate in the bidding. The decision makers needed to look at the market reality than pure mathematics. Any issuer should always pay heed to the reference price (which is the market quote) and give a suitable discount irrespective of the fundamentals. The ground rule of the market — “the market price captures the current value of the stock” — seems to have been forgotten by the decision makers. No investor (other than strategic), whether an institutional one or retail, would pay a premium especially when it’s not a scarce commodity. The government has to take this into account while strategising future divestments with regards to the pricing.

Markets this week are expected to remain volatile with three big events lined up over the next fortnight — Uttar Pradesh election results on March 6, RBI credit policy on March 15 and the Union Budget on March 16.

If one were to believe the various exit polls, the Samajwadi Party (SP) may be set to regain power and is likely to win around 185 seats in the 403-seat Uttar Pradesh assembly. However, it remains short of majority and may need a partner. The stock markets have to some extent build on a SP-Congress alliance; but in case they stick to their pre-poll stand of not forging a partnership, there also remains a possibility of a hung house with SP as the largest party. Hence, we could have a scenario of President’s rule.

In case of a SP-Congress alliance, it is expected to help revive stalled policy reforms for the government, thus may be positive for the markets. On the other hand, a hung assembly may see the markets reacting negatively and we may see a test of 5200 levels for the Nifty.

On Monday, markets are expected to react to the exit polls ahead of the actual results on Tuesday. With the Nifty still moving in the 5300-5400 range, the poll results may help break the same. Post this, we will see the budget and monetary policy expectations coming to the fore. In all, the markets are in for volatility and it should be utilised to one’s advantage. I would suggest buying selectively in case we see a sudden drop to 5200 levels or below.

Alternatively, in case we see a sudden spike due to positive election results, book out at levels above 5500 as they may not sustain due to budget fears which may cap the gains.

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Posted by TomHogshead | Report as abusive