Market Rally on Rate Cut Expectations – Will Earnings Follow ?

Indian Market RallyWith the the fall in global commodity prices over the past month, investors have been adding to their positions in India. Majority of investors were slightly overweight India.

Rate cut the Only Silver Lining
The current rally in the market could be attributed as investors position themselves for a faster than consensus rate cut led by (a) inflation falling faster than expected. The WPI data today at just under 5% has borne out this view (b) falling oil and gold prices helping ease the current account deficit worries (c) expectations that the change of RBI Governor would lead to faster rate cuts. Our analysis indicates that there is no clear indication that RBI policy changes on changes in RBI Governor.

Status of Growth and Earnings – Tepid
GDP growth will continue to be sluggish with the investment cycle unlikely to take-off this year. EPS growth for FY14 will be around 8% – 10% and Sensex EPS expected to be around 1300 levels makes it hard to justify the ongoing rally. For such a tepid growth, a long term SENSEX p/e multiple of even 15 looks expensive.

Dirty Governance of Ruling Party & Weak Opposition
The Ruling UPA is caught yet in another 2 scandals – Railgate Scam of Recruitment and Modification of Investigation report of Coal Scam. Markets will be focused on politics as we near the year-end with the state assembly elections in November and the general elections next year. There are large number of questions on politics as investors remain concerned about the nature and shape of the new government in India next year.

Current Account Deficit
The high current account deficit remains the key tail risk for investors. There were lots of questions on whether the fall in gold price would lead to higher demand or a saving in gold imports. Investors still remain concerned that a current account deficit could cause sharp rupee depreciation.

There are over 40 Signals to track and only when the most influential are favorable the market may signal long term uptrend. However, with only rate cuts hope, we do not BUY the market at current levels and wait for correction. Let your SIPs continue. Recall we had initiated a BUY

and if you are sitting on profits, Book Profits Partially.

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