The government has talked the market up successfully. But this may be a short-term effect. If the Greece elections have unfavourable results, or Spain goes into a tailspin, market sentiment will dive. And, what happens in Europe is not in the government of India’s hands.
The Prime Minister has announced an infrastructure package with massive targets for various sectors. But three years of policy paralysis have led to a stage where any assurances of policy action are being seasoned with large does of salt.
Many of these projects have been on the anvil for a while and these are held up, usually for one of the following reasons. In some cases, money isn’t available. In other cases, land isn’t available, or environmental clearances are in limbo. The cave-in on the Pension Bill makes one sceptical whether the political will exists to overcome those bottlenecks.
However, the revival in sentiment does throw up trading possibilities. If sentiment continues to remain strong, these could be converted into long-term positions.
If sentiment weakens, the trader will have to book profits and exit.
Infrastructure consists of very beaten down set of sectors. So there could be strong gains in the short-term on a revival. Most infrastructure stocks are highly liquid and available in the futures segment. If you do pick up a basket of infrastructure stocks, it could be prudent to maintain individual stop losses on each position. Or else, calculate the portfolio sensitivity to the Nifty and hedge via Nifty-based instruments. If it looks as though the government will actually deliver, the infrastructure portfolio can be held for a longer-term.
The RBI has also done its bit to talk the market up, and the rupee as well. The Bank Nifty and other rate-sensitive and financial stocks have rallied in the hopes of a rate cut in the next policy review on June 18. The rupee has also strengthened.
The rupee will continue to strengthen so long as there are FII inflows. Incidentally even in May, when FIIs were heavy net sellers in Indian equity, they bought a large chunk of rupee debt. This suggests that they are also expecting a rate cut.
Two things could derail the central bank’s efforts. One is, now that everybody is expecting a rate cut, it may have to lower policy rates by more than it wishes to maintain sentiments. Alternatively, it might find the market expressing disappointment if it doesn’t cut rates by more than the token 25 basis points. I’d guess that the market is already discounting a 50 basis point rate cut and maybe, just maybe, hoping for more.
This could result in a ‘sell on news, buy on rumour’ situation, where rate-sensitive stocks ride up till the RBI policy review and then correct on profit-booking. Until the policy is announced therefore, it may be worth taking long positions in specific rate-sensitive stocks, or the Bank Nifty. Of course, if the rate cut does satisfy the market, the long position can be maintained. Again, hedging is the prudent way to handle this sort of portfolio, which is dependent on policy action.
The other potential hurdle that the RBI faces is incalculable external situations. If the Eurozone goes bust, there will be huge outflows from rupee assets to safe havens like the US Dollar, and maybe the Swiss franc and the yen, as well. If there’s sign of a Euro revival, there may be some outflows anyway into beaten down hard currency assets in the EU. Some currency volatility is guaranteed
Currency futures traders could have a field day in that period if they guess right about the direction of the Dollar-Rupee and Euro-Rupee. The rupee may strengthen or weaken against both currencies and the Euro could strengthen or weaken against the Dollar. Hence, all four combinations of long-long, long-short, short-short and short-long could pop up as potentially winning trades. The chances are, once trends are established in the currency futures markets, they will last for a fair length of time. So a trader could actually afford to wait for the news out of Europe and take the trades one or two sessions down the line.
None of these positions would be precisely safe. The currency trades would be downright high-risk given promise of volatility and huge leverage. There are good reasons why the infrastructure space has taken such a beating. There are equally good reasons for investors to be wary about financials. But hope springs eternal and a sensible trader could play the current equity trends for profit through the next 5-7 sessions. If the revival in sentiment is genuine, the positions could be converted into long-term plays.