Friday, June 21, 2013

The gloom doom and panic - Is everything all that bad?

With all the talk of FII money flowing back to US markets from India and analysts suggesting levels which are unnerving, there is complete panic out there and people might be thinking what to do now. So in this gloomy scenario, is that all bad or people are over reacting? Lets look at the following points:

1. The Quantitative easing by Fed was anyway expected to start rolling back by year end and people were well aware that this massive money printing cannot go on foreever. As a result there has not been any bubble like situation in equity asset classes around the world. Most of the equity market are reasonably valued and Indian markets are also trading below historical average valuation. Hence there will be valuation support on further fall in equity markets in India. 

2. There was a bubble in Gold due to fear of inflation globally in past 5 years which hasen't happen and the gold prices are crashing down. With gold loosing it's investment sheen a part of the gold money should come to equities which should provide support to equity markets globally.

3. In Indian markets, DIIs have been net seller in the rally from 5700 to 6200 and are buying when FIIs are selling. So domestic financial institutions should provide significant support to Indian Stocks on further fall.

4. With 10% rupee depreciation that has happened since April this year, NIFTY and SENSEX are already 10% cheaper from current levels. So at 5600 Nifty it's already at 5100 levels for dollar investors. It will be more logical for FIIs to buy at this point rather sell as they are not going to gain much and even two billion dollars of selling can bring markets down by 10%. This should be seen in the context when we have already received $15 billion in Indian equities this year.

5. Crude and gold prices have fallen significantly in past couple of months and the govt. of India is taking all the steps to curb gold import. This should reduce the current account deficit significantly in coming months and hence provide support to our currency and markets.

6. The bulk of FII selling has happened in debt market which is quite obvious as the interest rate arbitrage for foreign investors have turned negative due to rise in US bond yields, fall in Indian Bond Yields and currency. Equties haven't seen significant FII outflow considering the fact that we receive $15 billion in first 5 months of this year. 

7. India dedicated funds are expected to utilize the fall in currency and markets to buy more at every fall and that is why we saw gross FII buying of around 2300 crores. Because the gross FII selling was 4400 crores we saw a net outflow of 2100 crores. Had there been panic and complete avoidance mood on Indian equities the FII selling figure should have been 6700 crores which didn't happen. That is positive as the hot money or ETF based FII money which are short terms in nature are going out.

So overall we do not expect the markets to fall off the cliff. Yes there could be incremental fall due to short term net FII outflows but the downside seems protected.

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