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Money Feb 2, 2013

Don't bet on a bullish market just yet

By Sunainaa Chadha

Betting on a "responsible" Budget, investors in equity futures and options refrained from rolling over their short positions in January series to February, thereby squaring off their bearish bets, a Business Standard report pointed out yesterday.

Earlier this month, finance minister P Chidambaram visited investors in Hong Kong, Singapore, Frankfurt and London to convince them that Budget 2013 will be prudent and that India will grow faster.

But even while investors are expecting the markets to peak in the run-up to the budget, a few analysts are not expecting any improvement in the market post the budget since the current rally is more due to global than domestic factors.

Reuters

The pre-budget bounce is a good time to lock into stock gains. Reuters

Domestically, all the fundamentals - growth, inflation, and the twin deficits - look poor. Compared with its peers, India stock market has been one of the worst performing ones this year.

The rally in Indian market invariably began with the global liquidity surge right after the US Fed announced its third round of quantitative easing and the European Central Bank announced its programme of "outright monetary transactions".

The move immediately flooded emerging markets with cheap foreign capital. Retail investors, however, have kept aloof from the euphoria and continued investing in real assets like gold.

Even domestic institutions have been cashing out of equities. According to the data available on NSE, foreign institutional investors net bought equities worth Rs 763.28 crore on Friday on BSE and NSE combined. Meanwhile, domestic institutional investors were net sellers worthRs 1,088.62 crore.

"Even while the markets are flashing green, stock prices are really not moving.. There is nothing holding the market strong apart from FII flows ," Andrew Holland, CEO (Equities), Ambit Capital told CNBC-TV18 in an interview.

He cautioned that due to the over emphasis on foreign inflows, India could suffer from a global risk-off trade due to some event in Eurozone or the US.

"The current account deficit (CAD) is a big concern for me and is something I am going to continue to watch, because if the currency starts to depreciate again, then all the hard work that India is trying to do at the moment would just be wiped-off in one go and that would scare investors if they saw a depreciation of the rupee rather than appreciation," he explained.

Moreover, all the reforms that have been introduced are not linked with the Budget- be it diesel and petrol price hike, FDI in retail and aviation or deferral of GAAR. Going forward, Chidambaram barely has any room to justify any further goodies to any one sector or tinker with personal tax.

As Firstpost said earlier, the "Sensex is doing the high-wire act because the markets have already assumed good things from P Chidambaram, whether it is in terms of fiscal deficit or reforms or rate cuts.

The current account deficit is likely to get worse in the third quarter, and if the fourth quarter does not show improvement, the RBI will again have to be cautious on rate cuts. The pre-budget bounce is a good time to lock into stock gains."

Economist Dr Haseeb Drabu had earlier this week cautioned against the over reliance on short-term foreign portfolio inflows as it exposes the economy to several risks. He believes that large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses.

Investors are keenly waiting for steps taken by the government to effect a turnaround in investment.But it remains to be seen if the government's recent policy initiatives would be able cause investment levels to return to healthy levels where it can trigger the uptick in GDP growth.

"The FM has indicated that the budget will be a responsible budget which may entail a reduction in fiscal deficit target. While this is positive, we need to wait for the finer details and assumptions behind the same," Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities, said in a note today.

As Manish Bhandari, MD at Vallum Capital told Firspost, "the current measures by the government are insufficient and look like baby steps... The economy is quite bad and I see the finance minister P Chidambaram missing numbers again. It's time to look at Bills pending in parliament for the upcoming session rather than Budget."

Hence the triggering point remains in fulfillment or non-fulfillment of reforms promised in the run up to the budget rather than the budget announcement it self.
Clearly the government needs to get its act together, or as an Economist article rightly says, "Investors rushing into India today are relying on a kind of greater-fool theory, in which everyone bets on an economic recovery but no one provides the capital to help make it happen."

by Sunainaa Chadha

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