ithought market wrap No. 51, dated 11 Nov 2011

Quick edit:
A slowdown has a way of spreading. Some sectors hold up longer than the rest. Over time, a slowdown hits most sectors and create a perception of fear and despondency. We are into a phase when nothing seems to be going right. The three i ‘s – Inflation , industrial growth and investment remain concern areas. Inflation will correct once the higher base effect kicks in. Industrial growth requires to be stimulated and no quick fix solutions are on the policy radar. Investment has virtually stalled hitting the industrial production hard. A policy fillip will revive investment and the coming budget should address that need. The environmental stalemate on mining will also get resolved soon. Industrial production and investment will revive gradually as they operate in a virtuous cycle. The time is right to do some hard thinking and to show a nose for good bargains. Catching a cold from the global flu will certainly not help the Indian investor’s cause.

Domestic funds are mostly long only funds & rarely hold high levels of cash unless they fear heavy redemptions. In the absence of redemptions, they are under very little pressure to sell and remain fully invested. Their selling is mostly in the nature of churning and maintenance. FII’s always set the market direction whenever they turn heavy buyers. The logic is simple. Domestic funds that match the FII’s buying with their selling cannot continue selling once they reach higher levels of cash. The fear of underperformance forces domestic funds not to hold cash beyond a certain level. They will even be forced to turn buyers if the FII buying remains strong. This scenario has eluded the Indian markets for a while now and we have had long bouts of buying and selling between DII’s and FII’s. This seesaw- like trading will end much ahead of when we think it will.

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