Rising interest costs

Maintaining moderate inflation is a little like trying to stay moderately pregnant.

• Anonymous

With the G- Sec yield breaking the psychological 8% mark on the back of an unexpected increase in inflation at 5.24%,   the Equity markets respected the same and corrected by 4%.  Corporate India is likely to feel the heat and Market participants have to tone down their profitability expectations.

While the FM, Chidambaram may be vocal of taming inflation, it is unlikely that he will be able to contain the rising Input (commodities) and energy costs.  

The real estate game...

Buy land, they’re not making it anymore.

• Mark Twain

Land/real estate adjusted for inflation has just given a 0.5% return in the last century in the US markets. Also, the maximum return/increase in real estate prices was observed during the Post 2nd world war era when there was a genuine spurt in demand for housing by the War-returned soldiers. So, if you are investing in real estate at the wrong timing, you may fail to see any appreciation at all for all your life.

Real estate in India is too see a radical change in the next few decades. While, the demographic dividend and the young population is likely to play on the demand side, the supply side is equally buoyant helped by  SEZs planned and Malls percolating to the tier-2 and tier 3 cities. With the integration of economies (rural & urban), development of infrastructure (Highways reducing time to commute) and increasing digitalization, demand led growth in the metros is likely to be low as compared to that in the non-metro cities. The initial leg of growth in real estate has been fuelled by the IT boom with IT hubs like Bangalore, Hyderabad, Pune and Gurgaon. Further growth is likely to be centered in areas of Manufacturing and Consumption. Cities like Nashik, Indore, Vizag, Ludhiana, Lucknow and Nagpur are likely to do well in the near future.

The buoyancy in the Indian real estate is also likely to come out of setting up of real estate Mutual funds which may be in place in the next 12-24 months. The Real estate related financial instruments are to create an artificial demand (investment relate demand).  

Rational to irrational to Rational OR............... Irrational to Rational to Irrational

The Sensex touched the high of 12,700 and soon after seen a sudden drop of 30% to show levels of 8,800.  While, with the recent decline happening everybody unanimously agree that the highs of 12,000+ were unjustifiable and the markets had to correct. But what are the levels that are currently justifiable by the markets is the broad question. Are we currently rational or irrational?

Well, while the two-day 1,000 point run-up might make to show that the recent 8,800 levels correction is highly unjustified and hence, the markets rebounded I beg to differ. The current situation in the Indian markets is of extreme fear where it is either one side up or one side mood depend upon the momentum fuelled by global stock markets performance.

What do I think?

1. Current market status remains a function of liquidity and not of fundamentals.


2. Markets need to be at 8,000-9,000 levels to accommodate for the rising concerns of American economy performance, rising fed rates, a steady rise in the domestic interest rates and the burden of high oil prices.


3. Long term story continues to be positive irrespective of US economy slow down with OIL prices the only possible party-spoiler.


4. Current interest rates have moved up in line with increase demand for credit and upside pressure to slowly decline.


5. Irrationality in the markets is likely to come on the negative side rather than the positive side currently. Indian retail investors feel trapped with most of the Mutual funds raising money at the peak Sensex levels and deploying them.  For confidence to back in the markets may take at least 6-9 months.


6. Sectors unaffected by rising interest rates and oil prices and focused on the Indian consumer likely to do well in the near future. I particularly like the Telecom, FMCG, IT  and Retail sectors

“Stock markets only tells you when you will be right, the strength of your analysis tells you whether you will be right” –WB

This time the stock markets are going to take time to say that you are right as compared to the recent past where whatever you picked up turned into Gold.

While many of us might think that a 305 correction might have brought rationality into the market …I do not think so. While the current levels are comfortable status quo for eth Indian markets …but is not with respect to global developments.  So, while we have seen irrationality on the upper side, it is likely that we will see irrationality on the lower side as well….were the brave will pick up their stock only to sell them in an irrational upside rally in the next 2 years.


A recap of my comments at the 10k level: (title 10K and more posted earlier)

Every person who has been bearish on the Indian markets seems to have been proved wrong with the earlier Sensex targets becoming current “strong support” levels. Well I do not blame anybody as I had earlier mentioned its part of their business - be it analysts, fund managers.The Nifty is currently trading at 18 times trailing earnings as compared to 14 times about 12 months before.  Generally a steep rise in EPS is marginally cushioned by a decline in earnings multiple, ensuring a moderate rise in indices. However, currently we see that the while the EPS has risen far above the normal trend line so has the P/E multiples, which is clearly signal of a lot of optimism built in the current share prices, even with interest rates slowly being pushed.Going by Past indices correction it is very clear that the higher the rise, the harder will be the fall. While the probability of a Harsh Mehta, Ketan Parekh kind of event is rare as the multiples aren’t at alarmingly high levels. However, I probably feel an internal political calamity could cause harm. Anyways returns from the current levels are  not going to be great.So better be sure of what you are invested into and be ready to hold it for long periods.