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India Equity Strategy
Color of Money: Liquidity punch
• Special focus – Liquidity punch. Liquidity in the interbank system remains
tight and the Government securities yield curve is bear flattening. The
Corporate bond yield curve has inverted marginally. Sticky inflation has
resulted in real interest rates remaining negative, despite monetary tigehtning,
and has inhibited deposit growth. We expect system liquidity to remain tight
through to the end of the fiscal year.
• Sectoral impact. The bear flattening yield curve should over the near term
put pressure on the performance of rate sensitive sectors - financials (state
owned banks in particular), real estate and consumer discretionary. We are
underweight real estate, consumer discretionary and state owned banks in our
India model portfolio.
• Equity markets cooling off. The Sensex has been consolidating over the last
two months, in line with expectations. The trend has been aided by tight local
liquidity and media reports on some corruption issues. The weakening in
sentiment is reflected in a substantial correction in the outstanding postions in
the derivatives markets and an increase in the put call ratio.
• Money shifting from local to global sectors. Our money flow monitor
suggests inflows into IT services and materials and outflows from financials
and industrials over the last month. The shift towards global cyclicals, from
local cyclicals, can be attributed to improved data flow on global growth and
the resultant surge in oil prices and INR depreciation.
• Insider activity. Insiders were net buyers over the month.
Net buy: Jaiprakash Associates, M&M, Kotak Mahindra Bank, HDFC,
HDFC Bank, Hindalco, Reliance Communication
Net sell: L&T, ITC, Dr. Reddy’s Lab, Jindal Steel & Power, Ambuja
Cement, DLF, Reliance Cap.
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