Sensex @ 20,000 – What FII Strategy Reports Suggest ?
September 21, 2010
The FII have bought into the Indian Equities as if their is no tomorrow and have made the BSE Sensex breach the historical 20,000 levels. What next ?
BNP Says – The Liquidity Driven Market Rally – typically drives markets and stock prices above fair valuation. During times of high liquidity (March-May’06 and Jan-December ’07 for example), the market tends to trade at large premium compared to fair value. During May 2006 and Feb 2007 Sensex traded at 17-19% premium compared to our fair value, while at the peak liquidity of January 2008, it traded at 65% premium. We believe if the current run rate of FII flows continue (i.e. 0.4-0.5% of free float market cap), Sensex could touch 15-20% premium to fair value estimate (19600 by December 2010).
BOFA Merrill suggests,
if the market uptrend continues, the outperformers may see some rotation. We, therefore, screen for stocks that have under-performed the current rally and are cheap relative to their history as a means of identifying ideas for investors. Some of the large cap stocks that look attractive on this screen are Reliance, Zee, BHEL, Sterlite, Wipro and Maruti.
JP Morgan on Midcaps – Mid-cap valuations have risen to near all-time highs, and the valuation differential with large caps has narrowed significantly. Also mid-cap trading volumes have risen to 70% of total trading volumes, at which level a correction in absolute terms and underperformance vs the large caps typically sets in. In the short term we would argue for a pause in the outperformance of mid caps relative to large caps.
Mid caps have outperformed their large-cap counterparts meaningfully in the Financials and Healthcare sectors, while they have lagged in the case of IT and Materials. J.P. Morgan economists expect the GDP growth rate to consolidate over the next few
quarters. This means that the best of the relative outperformance of mid caps could be behind us for now.
If you have been regularly reading our investment Advise, then you would be sitting on Big Profits – Should you cash out ? Yes just about 10% from Direct Stock Holding [You have to Churn your Portfolio and BUY the Laggards]. But don’t sell any of the Mutual Funds we have suggested as the fund managers are smart enough to hedge and continue to protect your NAV.