Market Will Move On Global Cues

- By SAIBAL GHOSH,
Chief Investment Officer,
AEGON Religare Life Insurance

The market participants have largely welcomed the budget and as a result post-budget the Indian markets have outperformed most of the other global markets. The foreign institutional investors (FIIs) are continuing to buy and almost a billion US dollars has already been nfused into the Indian bourses in the current calendar year. All the macro data points are positive and the lead economic indicators like auto sales, cement dispatches’ volumes, electricity consumption or container volume movements in major ports for the month of January 2010 are signalling robust economic growth going forward.

On the global front, perhaps we are in the midst of a shift of balance of economic power from west to east wherein India with her demographic premium and strong domestic economy is playing a major role and hence attracting significant capital inflows. However, the valuations appear to be stretched at the current level on FY11 earning estimates. As a result, in the immediate future the market will be extremely sensitive to global cues. As far as the global cues are concerned, in developed economies the exit from easy liquidity policies may still be a bit far, but an exit from the tunnel is in sight.

Though Fed has categorically denied that the recent raising of the discounting rate is any indication of monetary tightening going forward, it has already withdrawn four out of the seven emergency liquidity windows opened last year. Common sense suggests that the recent move by Fed is at least not supportive of the easy monetary policy that it has religiously adopted so far. As far as the Euro zone is concerned, high public debt, ageing population and the economies which have been growing at a lower rate than the fiscal deficit (as a percentage of GDP) signal the limitations of the European countries (inclusive of the UK) to pursue the expansionary monetary policy further.

Therefore, the strength of liquidity which has been fuelling the emerging market equity rally to a great extent is getting weaker. On the domestic front, we are in a precarious situation of high domestic growth, stretched valuations, rising interest rates and vulnerable global cues. However, in the month of June/July 2010 when the 1QFY11 numbers are out in the market, hopefully the inflation will be under control by then (due to favorable base effect and as a result of inflation combating measures taken in between).

There is also an early sign of the progress of monsoon and with the investment cycle turning around, the market will start discounting FY12’s expected numbers in a big way. However, there are too many uncertainties in between and till then we will maintain our stance on domestic consumption leading the growth story.