Book Profits in the Bear Market Rallies

India’s long-term story is intact but unfortunately we are in a bear market. The 5 main factors adding fuel to the fire are – Macro, Global Risk Appetite, Monsoon, Earnings Outlook and Sentiments.

The macro is bad with high crude oil prices and hence rising inflation, slowing growth and ultimately, higher long bond yields. Global risk appetite or global financial market conditions are key given India’s relatively high beta status underpinned by how India’s balance sheet is funded.

Possibility of a bad monsoon in Karnataka, Maharashtra, Andhra Pradesh and Parts of Central India will dampen the Agri sector. Earnings outlook is weak. 6 Months ago only the American stocks were hit and we had the de-coupling theory, however with Q1FY09 results, it is evident and the consensus is ready to cut numbers due to slowing growth. Fragile sentiment which could get a lot worse before getting better.

This Rally will sustain and move sidewards if crude remains soft, Inflation stays sub 12%, the RBI delivers a benign policy at the end of July on the back of slippage in crude oil prices and the earnings season does not produce a major negative.

Financials and Capital Goods are likely to underperform; Healthcare and Telecom will likely outperform. Keep booking profits on Rallies only to BUY Back at lower levels later bringing down your average cost of acquisition.