Time To Reap Fruits

 

Though the economy is doing well, one needs to look out for selling opportunities:

Two years after the storm broke across the financial world, the India growth story continues to roll. Despite some disturbances, our GDP has reverted to an average growth rate of over 8 per cent per annum, and our corporates turned in stellar numbers last quarter.

In response, the stockmarket has held up well.Since Diwali, the Nifty has held the 5000 mark, with only a few short dips.

The private sector is being forced to reduce its debt levels, so one needs to be wary of firms with a lot of debt

Yet, there is a certain nervousness in the stockmarkets, of which India VIX, a volatility index, is the best indicator. On 26 May, the India VIX hit its high for the year at 35.86 and closed at 34.52. The India VIX levels do tend to peak on the last Thursday of the month when futures & options (F&O) accounts are settled. However, earlier this year, in April, volatility peaked at 23.15; in March, at 20.27; even in February, despite the uncertainty regarding the recommendations of the Union Budget, volatility was relatively low, peaking at 32.14.

At the same time, it must be said that the India VIX has been much higher: in mid-October 2009, it crossed 60, and the uncertainty triggered a sharp drop in the Nifty, from 5175 on 17 October to 4687 on the last trading day of the month.

In other words, although the European debt crisis has troubled our markets a fair deal, the reaction has been muted, both in terms of the index level and volatility.

What’s on the cards? On the positive side, commodity prices are falling—of both ‘soft’ goods (such as wheat, sugar and milk powder), as well as of industrial goods such as metals and crude oil. This will have a favourable impact on a wide range of companies, whether fast-moving consumer goods (FMCG), consumer durables, or the auto sector. The latter, though, will also have to deal with a gradual increase in fuel prices as the government tries to lower subsidies. Gas prices have already risen, and both diesel and petrol will move towards decontrol, though we can hope that the price of crude oil will drop to a level where the government can free product prices without having to raise them.

The auto sector may also be impacted by interest rate hikes, which seem inevitable, although sales are on such a roll that they seem unstoppable. Concerns about interest rate hikes seem to be affecting the real estate sector more, though I suspect that the worries are more about the huge debt burdens that firms are carrying.

It is at this level that our linkages with the rest of the world are deep—between the years 2003 and 2007, many Indian firms grew rapidly thanks to the easy availability of capital overseas. As debt becomes due, it is becoming more difficult for most firms to roll it over at attractive terms. As a result of this, the world over, the private sector is being forced to reduce its debt levels, so one needs to be wary of companies that are carrying a lot of debt on their books.

At the aggregate level, the Nifty is priced at 21 times its historical earnings. This is far from cheap. It is below 22—above which lies the Bubble Land. In other words, we are now at a level where the lights are amber. Cash in on stocks that are over-priced; if you have made money on them, so much the better.

And do not be afraid to hold cash—at the current levels, international disturbances are likely to provide the retail investor with several buying opportunities.