Wednesday, December 1, 2010

Beware wild mood swings

The sentiment in financial markets is becoming quite bi-polar: last week we were all despairing because of the bribes-for-loans scam and the likelihood of penalties for telecom companies; this week, the bounceback has been sharp - especially yesterday - as investors celebrate good numbers for India's GDP and the HSBC manufacturing survey.

While savvy traders can make money from these swings, long-term investors need to be somewhat more detached, at best taking some profits during sharp profits, and adding well-understood scrips during falls.

From this longer-term view, it is probably relevant to note that the Nifty is up about 14% this fiscal, and sharp moves have been fairly short-lived. Economic growth has been strong, certainly much stronger than I would have predicted, but we are faced with huge constraints in physical infrastructure, as well as in the government's deficit, and the export deficit. Inflation continues to worry the RBI, and Deputy Governor Subir Gokarn was quoted this morning as saying that it is becoming structural. His institution is thus having to find a balance between providing liquidity and anchoring inflation expectations. The bias is clearly towards harder interest rates, and yesterday the 10-year bond yield closed at 8.11%, near its highest since September 2008. This is having its impact on loans for housing; with low, 'teaser' rates disappearing from the scenario, and a hardening of the Prime Lending rate by HDFC, the interest rate spectrum for housing is edging up.

On a purely technical basis, with the recovery in the indian economy well into its second 12-month period, standard comparisons that we equity analysts perform are going to be dealing with the 'base effect': coming off a low, Year-on-Year (YoY) comparisons make sales and profits look very good, but once growth has stabilised, these figures are less dramatic. The car sales for November are a case in point: after stagnating between 2008 and 2009, the growth in car sales in 2010 has been stellar thus so far; in November, though, some of the drama seems to be fading.

The Indian economy is doing well, but this is not the time for wild exuberance.

No comments:

Post a Comment