DSIJ Mindshare

Trading strategy - Play a long innings

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V K Sharma
Head of Business - Private Broking & Wealth Management, HDFC Securites


The ongoing result season can at the best be called drab. Of the 416 companies for which we have the data, sales are up 30.5 percent and profits are up 29.3 per cent. Companies have struggled to maintain their margins. We expect the markets to be weaker in the first week of May in the light of the rate hike and see some recovery in the second week. This will be a period of consolidation. It will be quite in contrast to the general belief of a sell-off in May.

We also have to see the impact of the new happenings in the US, the Japan tragedy and the Libyan crisis. Let us consider Japan first. It is the world’s third-largest economy and a setback there will impact the global GDP growth. However, with a lag of a quarter or two, we will see the economy bouncing back because the spending on rebuilding the infrastructure will buoy the economy.

The Libyan crisis is a part of the larger movement across Africa and the Middle East, which is seeing an awakening. This can spread to other countries like Yemen, Iran and Saudi Arabia. Libya produces sweet crude which is lapped up by the Europeans. For the time being these exports are not happening. This has lit a fire under the crude pot. But the crude prices could tumble when the Libyan ceasefire happens. In the US, the most important event that is going to happen is that the Fed will end its quantitative easing, better known as QE2, by June 30. This has got the markets worried. However, the Fed is not likely to reduce its balance-sheet.

Out of the proceeds of the bonds that will be redeemed, the Fed will buy more fresh bonds. This will keep the liquidity tap on. We believe fertilisers and seed companies may do well. Land is reducing and population is increasing. There is an urgent need to increase productivity. The high agri prices will mean better prices for seed companies.

Banks are currently under pressure because of the hike in interest rates but they will be good picks after this correction. Pharma and FMCG can still deliver goods in this environment. In my view there are still some triggers left. In the immediate future, the biggest trigger will be China. If the softness seen in the latest data is repeated in the coming months, commodities could weaken. The broader markets could  follow through.

A higher interest regime in India could hurt temporarily but could also appreciate the rupee, which may attract FII inflows. Corporate results and government policies could also sway the markets. My advice to retail investors in the current market scenario is simple. They should systematically invest in the markets. An SIP beginning with December 2007 would have given returns of 26.7 per cent as compared to a loss of 7 per cent in the markets. They should remember that for the past 40 months, the markets have not touched a new high. The growth of the last three years is yet to be reflected in the markets. But they should invest with a view of 3-5 years.

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