Markets seem to have more upside, specially the broader market

Sandip Sabharwal - Uncategorized - Markets seem to have more upside, specially the broader market

Writing after a long time now mainly because I was unwell for some time and then went out for a holiday to Hong Kong and China. I think markets behaved just fine when I was out and helped me have a stress free holiday.

As I had written in an article around a month back the markets were looking to have a 10% kind of upside out of which we have already seen a 6-7% upside. The key to evaluate now is whether the upside still exists. I believe that it still does, in the background of a sharply improving economy and an excellent start to the Monsoon rains in India which look to be on track to be normal to excessive. The economic growth numbers in terms of Industrial growth was very strong at 17% plus and all indicators point to the fact that it should remain high going forward.

The government finances seem to be improving at a much faster rate with an huge addition to the kitty due to the Telecom spectrum auctions which by itself can reduce the fiscal deficit by over one percentage point in case there are no slippages on the expenditure side. The indirect tax revenues for the first two months of the fiscal year are also higher by nearly 50%, contributed both due to higher growth as well as the increase in tax rates in the Union Budget. By all indications government borrowings should be much lower that expectations and the post September busy season and the festival season should see good liquidity support for the economy due to lower net government borrowings. As such a combination of higher than expected growth rate combined with better revenues should see the fiscal deficit moving towards 4% instead of the forecast 5.5%.

In terms of the global situation there has been hardly any fresh news flow except for the Chinese decision to have greater flexibility on its currency and its elimination of a large number of export sops. Both these factors are positive for other emerging economies at the competitive landscape will become better at the margin. As I had written in my previous article the Chinese currency is estimated to be undervalued by over 30% and has no way to go but up. On the first day after the Chinese announcement commodity stocks went up sharply. However I do not think that there is any case for a big commodity upswing given the fact that the Chinese moves will not lead to an increase in commodity consumption in that country, if at at it should see a gradual slowdown. This combined with the the kind of Austerity measures that most of the European governments have been announcing over the last month or so should keep global growth subdued for an extended period of time going forward. The current year will see a higher growth due to the bounce back from the lows of last year. As such there does not seem to be a big commodity story in the near term.
The US dollar also has started its corrective move and this should last for another 4-5 weeks. This will be good for equity markets globally. The key is to see whether this is just a correction of a longer term US Dollar upcycle or the Dollar has peaked out for now. It does not look like being a longer term top for the Dollar as of now. Thus the next phase of US Dollar appreciation could lead to another subdued phase for the stock markets globally.
As the markets have climbed a wall of worry over the last one month, the broader markets in general have underperformed the large caps. I believe that in the next phase of upmove we will see a more subdued upmove for the large caps and greater movement in the broader markets. The mid cap participation in the upmove should take place now. The sharp improvement in the real economy has led to a sharp improvement in the operations of a large number of smaller sized companies. However a similar improvement does not seem to have happened in their stock prices. This should follow through over the next few weeks as the results for the first quarter of the current financial year come through.
Overall I would think that the next few weeks should see a 4-5% upmove for the indices and a 8-10% upside for the broader markets.

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