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KOTAK CONNECT
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Market Perspective
AUGUST 24th , 2012
Indian markets ended marginally lower on Friday with losses of about 0.5%.
This could be because weak global markets marred market sentiments. Global
markets were weak after St. Louis Fed President James Bullard threw cold
water on the expectations for further Fed easing, saying that current
economic conditions are not weak enough. The continuing stalemate in the
Indian Parliament over the CAG report also weighed on the markets, we
believe.
Benchmark indices ended a shortened week almost flat. They gained by
between 0.3% – 0.5%. The small and mid cap indices under-performed the
benchmarks and were lower by about 0.5% – 1% for the period. However,
several of the mid-caps did well because of associated triggers. For the
week, IT, FMCG and Pharma sectors were the outperformers whereas the
banking index was down due to reduced optimism about RBI action on
interest rates. The high consumer price index inflation number watered
down expectations about immediate rate cuts.
The currency fluctuated in a narrow band during the week. Uncertainties in
the global economy and the lack-lustre FII flows over the past few days
have kept the currency subdued.
The markets have been surprisingly steady and have been moving up slowly
despite local as well as global concerns. China has consistently reported
weakening data over the past few weeks. The situation in Europe continues
to be very uncertain, though the chance of catastrophes are lower , we
understand. US data has improved in past few weeks, but not significantly.
Markets are likely taking heart from expectations that, weak data will
lead to quick action from central banks in terms of ensuring liquidity.
Thus, every negative piece of data has been met with optimism.
On the domestic front, while monsoon deficit has reduced, other concerns
have emerged. Brent crude is trading at about $116 / barrel mark and the
rupee has not appreciated by much. Food inflation remains high and retail
fuel prices remain suppressed.
Fiscal reforms are awaited by the markets and hopes are high after the new
Finance Minister has come in. However, markets are yet to see any concrete
initiatives being taken up, though efforts are being made to arrive at a
consensus.
The CAG report on coal, power and aviation has resulted in a stand-off
between the ruling and opposition coalitions, leading to suspension of
parliamentary proceedings. An early resolution to the stand-off and
resumption of proceedings is needed, if some of the pending reforms are to
be taken up.
We continue to believe, though with lower conviction, that some of these
initiatives will be taken up by the Government, which will likely address
the concerns about fiscal deficit, administrative and procedural delays,
etc. These are a pre-requisite for the markets to go up sustainably.
Valuations are now at about 14.5 times FY13E earnings, which is almost at
the median level of the long term band. Risk-averse participants may do
well to be slightly under-weight on the markets at least in the near term.
As of now, we continue to maintain our bias towards companies with able
managements, strong balance sheets and reasonable valuations.
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