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The domestic stock markets have had some amount of stability in the month of April. The markets have been trading in a tight range of approximately 500 points on the Sensex . This stability, however, belies the fact that the economic fundamentals are showing no signs of improvement. Food and fuel prices are going up, and the Wholesale Price Index (WPI) based inflation rate is still trending higher.
The divergence between underlying factors and stock market valuations shows that the markets are supported by liquidity. Foreign institutional investors (FIIs) have been net buyers in the markets last month. But will this trend continue? Liquidity by itself is a weak support for the markets.
For markets to remain stable at the current levels or trend higher there needs to be some improvement in the economic indicators .
Liquidity factor
Meanwhile, stocks are finding buyers at every decline. As shown in the table FIIs have been buying last month. This is in continuation of the change of stance that they took in March 2011.
Their withdrawals in the months of January and February 2011 caused a 30 percent decline in the values of stocks. So, gauging their future action is very important for the task of generating returns from equity. The first indicator to understand FII action is the US Federal Reserve's policy, because the two quantitative easings brought in easy money for the emerging markets and have pushed up the prices of food, commodities and stocks, thereby threatening destabilisation of economic fundamen tals.
Easy liquidity is supporting stock prices and fortunately for the stock markets, this may continue in the near future, or at least for the next three months according to Ben Bernanke , Chairman, Federal Reserve. He said the first step in tightening the interest rate policy could occur after two Fed meetings , that is approximately three months from now. Till then, the conditions are expected to remain very accommodative with easy liquidity, which will be good for growth assets such as stocks.
Possible decline in dollar
Easy money policy is having an impact on the dollar. It's down about 10 percent since December 2010 against a basket of currencies and this weakness is expected to continue. This could be good news for India, if the weakness in the dollar strengthens the rupee.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The domestic stock markets have had some amount of stability in the month of April. The markets have been trading in a tight range of approximately 500 points on the Sensex . This stability, however, belies the fact that the economic fundamentals are showing no signs of improvement. Food and fuel prices are going up, and the Wholesale Price Index (WPI) based inflation rate is still trending higher.
The divergence between underlying factors and stock market valuations shows that the markets are supported by liquidity. Foreign institutional investors (FIIs) have been net buyers in the markets last month. But will this trend continue? Liquidity by itself is a weak support for the markets.
For markets to remain stable at the current levels or trend higher there needs to be some improvement in the economic indicators .
Liquidity factor
Meanwhile, stocks are finding buyers at every decline. As shown in the table FIIs have been buying last month. This is in continuation of the change of stance that they took in March 2011.
Their withdrawals in the months of January and February 2011 caused a 30 percent decline in the values of stocks. So, gauging their future action is very important for the task of generating returns from equity. The first indicator to understand FII action is the US Federal Reserve's policy, because the two quantitative easings brought in easy money for the emerging markets and have pushed up the prices of food, commodities and stocks, thereby threatening destabilisation of economic fundamen tals.
Easy liquidity is supporting stock prices and fortunately for the stock markets, this may continue in the near future, or at least for the next three months according to Ben Bernanke , Chairman, Federal Reserve. He said the first step in tightening the interest rate policy could occur after two Fed meetings , that is approximately three months from now. Till then, the conditions are expected to remain very accommodative with easy liquidity, which will be good for growth assets such as stocks.
Possible decline in dollar
Easy money policy is having an impact on the dollar. It's down about 10 percent since December 2010 against a basket of currencies and this weakness is expected to continue. This could be good news for India, if the weakness in the dollar strengthens the rupee.
This could partially offset the impact of increases in crude oil price. A strong rupee can bring down the domestic cost of fuel and thereby reduce the load on inflation.
TINA factor
The steady flow of FII money can also be attributed to the TINA factor. There is no alternative (TINA) investment avenue available. The Euro zone is in trouble. The US markets are fairly-valued and the ballooning debt over-hang makes it a dangerous market to invest in.
Hence, liquidity flows to countries such as India that are relatively strong in the growth parameters . The stock markets of Argentina, Turkey, Indonesia and Thailand have given more than 20 percent returns in the last three months indicating the flow of liquidity into these countries.
Investment strategy
These are indeed tough times for investors. The stock markets tend to catch them by surprise sometimes. The rally from the 5,400 levels to the 5,900 levels was so short and swift that many individual investors could not capitalise on it.
Now the markets are stable on a daily basis, but very volatile on an intraday basis. This has kept the traders away from the stock markets. The trend of high inflation, rising interest rates, weak dollar and rising commodity prices will continue for sometime.
The markets may remain stable for a while indicating a time correction rather than a price correction.
However, the next event that could bring an upheaval in the markets will be the termination of the second quantitative easing in the month of June. This could slowly put a stop to easy liquidity. Globally, analysts are investing in emerging markets and precious metals, a trend that investors can closely track for their investments.
TINA factor
The steady flow of FII money can also be attributed to the TINA factor. There is no alternative (TINA) investment avenue available. The Euro zone is in trouble. The US markets are fairly-valued and the ballooning debt over-hang makes it a dangerous market to invest in.
Hence, liquidity flows to countries such as India that are relatively strong in the growth parameters . The stock markets of Argentina, Turkey, Indonesia and Thailand have given more than 20 percent returns in the last three months indicating the flow of liquidity into these countries.
Investment strategy
These are indeed tough times for investors. The stock markets tend to catch them by surprise sometimes. The rally from the 5,400 levels to the 5,900 levels was so short and swift that many individual investors could not capitalise on it.
Now the markets are stable on a daily basis, but very volatile on an intraday basis. This has kept the traders away from the stock markets. The trend of high inflation, rising interest rates, weak dollar and rising commodity prices will continue for sometime.
The markets may remain stable for a while indicating a time correction rather than a price correction.
However, the next event that could bring an upheaval in the markets will be the termination of the second quantitative easing in the month of June. This could slowly put a stop to easy liquidity. Globally, analysts are investing in emerging markets and precious metals, a trend that investors can closely track for their investments.
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