The stock markets are having a high degree of intra-day volatility ever since they have touched a two-year high this month. Strangely, this volatility remains intraday and at the end of the day, the markets are trading flat.
Analysts feel this could be due to the fact that there are as many positively-inclined market participants in the stock markets as those who have a negative opinion and think a stock market crash is imminent. The pull and push of equally opposite forces has kept the Nifty in a tight range for over two weeks.
ADB’s vote of confidence:
The Asian Development Bank (ADB) again emphasised that India is poised for an economic growth of 8.2 percent in 2010, although the rising inflation rate would remain a concern. The report said even though the overseas demand will take some more time to revive, robust domestic consumption and rising investments would place the economy firmly on the growth trajectory.
'Expansionary fiscal and monetary policies are now being wound back gradually as the rebound gains traction. While trade flows have yet to return to precrisis levels, rising private consumption and investments are likely to underpin growth over the next two years' , the ADB said.
The outsiders' view of the domestic economy has been positive. The faith reposed by them in the regulatory authorities' ability to control macroeconomic problems seems to be higher than that of investors here.
High FII flows:
This degree of confidence in the domestic economy can also been seen in the foreign institutional investor (FII) inflows. They have invested Rs 25,277 crores in 2010. Out of this Rs 18,833 crores came in the month of March alone.
FIIs have been pouring money in simply because on a comparative basis, India is a better investment destination and probably one of the few countries in the globe that promises a healthy growth rate.
FIIs come from countries with very low risk-free rates of returns. Hence, their returns expectations is low unlike domestic players whose benchmark returns is high as the riskfree returns itself is about eight percent or so here. Perhaps, this is one of the biggest reasons why FIIs are willing to pay much higher prices for stocks and other assets than the typical domestic investor.
High valuations:
The incessant inflows have pushed up the asset prices in the domestic stock markets. Valuations are pushing towards an upper range with the market priceto-earning ratio (P/E ratio) at 21.67, a level which analysts find uncomfortable.
While many market participants are pretty happy about the fact that they are going to get a fairly good earnings growth this quarter and in the financial year 2011 going forward, one red flag that seems apparent now is that 65-70 percent of the earnings growth is coming from the metal and materials sectors that are highly volatile and unpredictable.
So, the domestic opinion is that even if the market trends up it will purely be due to momentum rather than any fundamentally-justified valuations. Further, inflows from FIIs could push the markets up more. In fact, recent reports state that there is scope for some $2.9 trillion parked in US money market funds to find its way to emerging markets .
The continuance of capital inflows depends on the governments of Western countries continuing with their easy monetary policies . This inherently builds up the volatility in the system . Any global factor could trigger a withdrawal of liquidity , thereby causing a correction in the markets.
Investment strategy:
Investors' investment decisions going forward will depend entirely on their investment horizon. If their outlook is for two or three years, staying invested with high quality companies and take the correction as and when it happens without worrying would be a good strategy. But if the horizon is short-term and aggressive , slowly raising cash levels may be appropriate.
This will give an opportunity to enter the markets at lower levels if there is any correction triggered by global factors . There are enough reasons to believe at this point in time that from a two to five year perspective, the domestic markets are undervalued . Any corrections, hence, should be used for building long-term wealth.
From an international perspective, emerging markets such as this still look attractive for risk-tolerant investors because these economies are growing faster and their companies will generate higher returns.
Analysts feel this could be due to the fact that there are as many positively-inclined market participants in the stock markets as those who have a negative opinion and think a stock market crash is imminent. The pull and push of equally opposite forces has kept the Nifty in a tight range for over two weeks.
ADB’s vote of confidence:
The Asian Development Bank (ADB) again emphasised that India is poised for an economic growth of 8.2 percent in 2010, although the rising inflation rate would remain a concern. The report said even though the overseas demand will take some more time to revive, robust domestic consumption and rising investments would place the economy firmly on the growth trajectory.
'Expansionary fiscal and monetary policies are now being wound back gradually as the rebound gains traction. While trade flows have yet to return to precrisis levels, rising private consumption and investments are likely to underpin growth over the next two years' , the ADB said.
The outsiders' view of the domestic economy has been positive. The faith reposed by them in the regulatory authorities' ability to control macroeconomic problems seems to be higher than that of investors here.
High FII flows:
This degree of confidence in the domestic economy can also been seen in the foreign institutional investor (FII) inflows. They have invested Rs 25,277 crores in 2010. Out of this Rs 18,833 crores came in the month of March alone.
FIIs have been pouring money in simply because on a comparative basis, India is a better investment destination and probably one of the few countries in the globe that promises a healthy growth rate.
FIIs come from countries with very low risk-free rates of returns. Hence, their returns expectations is low unlike domestic players whose benchmark returns is high as the riskfree returns itself is about eight percent or so here. Perhaps, this is one of the biggest reasons why FIIs are willing to pay much higher prices for stocks and other assets than the typical domestic investor.
High valuations:
The incessant inflows have pushed up the asset prices in the domestic stock markets. Valuations are pushing towards an upper range with the market priceto-earning ratio (P/E ratio) at 21.67, a level which analysts find uncomfortable.
While many market participants are pretty happy about the fact that they are going to get a fairly good earnings growth this quarter and in the financial year 2011 going forward, one red flag that seems apparent now is that 65-70 percent of the earnings growth is coming from the metal and materials sectors that are highly volatile and unpredictable.
So, the domestic opinion is that even if the market trends up it will purely be due to momentum rather than any fundamentally-justified valuations. Further, inflows from FIIs could push the markets up more. In fact, recent reports state that there is scope for some $2.9 trillion parked in US money market funds to find its way to emerging markets .
The continuance of capital inflows depends on the governments of Western countries continuing with their easy monetary policies . This inherently builds up the volatility in the system . Any global factor could trigger a withdrawal of liquidity , thereby causing a correction in the markets.
Investment strategy:
Investors' investment decisions going forward will depend entirely on their investment horizon. If their outlook is for two or three years, staying invested with high quality companies and take the correction as and when it happens without worrying would be a good strategy. But if the horizon is short-term and aggressive , slowly raising cash levels may be appropriate.
This will give an opportunity to enter the markets at lower levels if there is any correction triggered by global factors . There are enough reasons to believe at this point in time that from a two to five year perspective, the domestic markets are undervalued . Any corrections, hence, should be used for building long-term wealth.
From an international perspective, emerging markets such as this still look attractive for risk-tolerant investors because these economies are growing faster and their companies will generate higher returns.
