Reason For Current Up Side Rally Of Market And Its Sustainability

By Author: Market Review
Total Articles: 11
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It is said that there always sun rises after the night ends. Equity markets seem to be the perfect example of this axiom as they surprised investors this time also as always. Let us have an outlook on the previous and current market conditions. Then we will see the reasons which added a fuel in this fire.

A PREVIOUS AND CURRENT GLIMPSE OF MARKETS:
When we look back to DECEMBER 2011 there was a perfect recipe prepared for the markets disaster such as falling rupee, rising inflation, tight liquidity, sovereign debt concerns in Europe, FII outflows, rising fiscal deficit and widening current account deficit. There was a fear among the investors that we are again going in to the recession.
But today conditions are totally different rupee recovered by 10% from its lows, inflation down to 7.5%, RBI supporting the rupee and infusing liquidity by way of OMOs and a CRR cut, European Central Bank (ECB) on its way to infuse huge chunks of liquidity in the banking system, possibility of U.S. Fed keeping rates low through 2014, FIIs resuming their inflows in Indian equities and current account deficit being expected ...
... to narrow due to an import duty hike on gold imports.
With all these factors equity markets also fired back up to 15% up from its bottom in 2012 which initially looked like it was a short covering only but later it made the people to think that it was a start of new sustainable upward move.

KEY FACTORS OF THE RALLY:
Now coming up to the reasons which played a key role in this rally was it FUNDAMENTAL or LIQUIDITY. Yes initially it was a LIQUIDITY driven rally when on DEC 2011 European Central Bank (ECB) lent 489 billion Euros to banks by way of LTRO (Long Term Refinancing Operations) for three years, to buy sovereign debt of troubled EU nations. Today, markets have built in expectations of another trillion Euros worth of liquidity infusion in the next tranche of the LTRO due on February 29.
On the fundamental basis also there was some relief as growth in INDIA revived again from surge in HSBC PMI indexes in Dec 2011 and Jan 2012, whereas inflation has shown early signs of moderation. Even the RBI monetary policy stance seems to have turned pro-growth.

MARKETS NEXT MOVE:
With repayments of nearly 1.1 trillion Euros due in 2012, neither can the EUROPE afford to let Greece default, nor can it let yields rise prohibitively high so as to make refinancing impossible. Further, European banks have about $665 billion of debt due in the first six months of the current year, with a further $370 billion maturing by the end of 2012. In all probability, LTRO or backdoor QE, as one may call it, should continue for some time until Germany starts playing the role of hardliner once again. Liquidity environment is likely to remain supportive in the near term.
However, markets are unlikely to get much support from fundamentals in the near term as key indicators show growth moderating in the current quarter. The RBI is also non-committal on easing interest rates, even though they clearly intend to ease liquidity. One can take risk when investors are discouraged, risk aversion is running high, and economic difficulty is all over the headlines. A ‘buy on dips’ strategy should work well for equity investors in the near term. Valuations still remain attractive in specific pockets making it a perfect time for selective stock pickers following the bottom-up approach for stock selection.
Key risks to the above outlook might arise from surprise deterioration in the situation in Europe, the probability of which seems to have abated in the near term due to massive liquidity infusions from ECB. Apart from the above, results of upcoming state elections, mainly Uttar Pradesh, as well as the annual budget due on March 16 will remain the key factors to look out for in the near term. The RBI had clearly mentioned in its last monetary policy meet that any rate cuts in the near future will be contingent to the government adopting fiscal deficit reduction measures in the upcoming budget. Fiscal deficit is thus likely to remain the dominant theme in the upcoming budget.