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Motilal Oswal

By Motilal Oswal 24-May-2010 | 10:55

I am building a bullish case scenario in India inspite of all the turmoil in financial markets around the globe. European markets are further down 2% today, as I write now. I am pretty confidant that inspite of sensex and nifty having broken the 200 dma, there is a very strong case for being on the long side of the market now. I would avoid commodities for sure, but would strongly look to buy consumer discretionary and consumer staple names in these panicky circumstances. I would think that markets may be very close to a bottom and these may god sent oppurtunities to buy especially for those who might have missed it earlier. I know that this is in sharp contrast to many people’s opinion in the market but this how I feel at the moment .I must also add that one should be buying only in the cash market from a medium to a long term perspective and not on the derivatives side.

 

Looking at the fourth quarter results: As on 17 May 2010, 87 companies in our universe reported results for the March 2010 quarter. Aggregate performance is in line with estimates: Sales grew by 32% , EBIDTA grew by 27% ,and PAT grew by 23% .35 companies in our Universe reported PAT higher than estimate, 22 in line and 30 below estimate. On the EBITDA front, 32 companies reported above estimate, 31 in line and 24 below estimate. Among large sectors, Metals, Auto, Pharma, Engineering and Telecom PAT were above estimates, whereas IT, Oil & Gas and Cement were in line.On the sensex front, of the 20 Sensex companies that have reported March-10 quarter results, PAT aggregate is in line with estimate PAT growth of 13% vs estimate of 15%. (EBIDTA growth is 25% vs estimate of 29%).Thus quarterly profits are in line.


In Europe, things are not as bad as it is being made out to be. The Union is not as indebted as one may think. Aggregate leverage in Europe (consumer, corporates and government) at 220% of GDP is below that of the US (270%), the UK (300%) and Japan (363%). The savings ratio in core Europe is 6x that of theUS. The problem is the distribution of the government debt. Hence, from an economic point of view coreEurope can continue to finance transfer payments to the periphery. To stabilize government debt-to-GDP, fiscal policy has to be tightened by 3% of GDP in the Euro-area as a whole, but by 7% to 8% in the US,Japan and UK (assuming a normal economic recovery). The relentless fall in European markets may be more on account of technical factors like ban on short selling certain securties, imposition of tax on securities transactions etc .Again, If interest rates in the G3 are going to be closer to zero, there is not too much that equity markets can fall in these regions as well.These things will automatically get corrected sooner than later.

 

In China there is monetary tightening to slow down the economy and that is why commodities are falling. However, I  feel that one should not take a country sitting on two trillion dollars of reserves too much for granted. They can do anything .Commodites are therefore best avoided for the time being.


In India, the fiscal situation may have just got somewhat better .The 3G booty has given the government enough elbowroom to manouvre around the fiscal deficit target of 5.5% for FY11.Structural reforms on the oil and gas are happening and more of these are in the offing, monsoons seems to be on track and domestic demand pretty strong as reflected by consumer confidence indices.

 

So the moot question remains -Why should one be so bearish?Haven’t we seen markets before that Indian markets always fall because of global reasons and always rebound very strongly due to local reasons . It is only a matter of some time.