Never argue with liquidity

When The Smart Investor said that “Bulls see a ray of hope” (bit.ly/Qw3GRs) some three weeks ago, it was still not fashionable to do so. In fact, the idea itself was considered to be flawed. Worries about Europe still loomed large, India’s growth numbers were already hopeless and falling and the government looked more impotent than ever as opposition was literally hauling them over the coals. “How can the market go up?” bears were heard growling.

But, thanks to some astute market minds, who read the undercurrent, we were convinced that “this is how tezi begins…” I can only hope you took the cue and are now laughing to the bank.

Now that I am done with my little “We told you so” indulgence, let me come to the broader point I wanted to make. Today, as we stand at 18,550, a good 700 points above the day when we saw the ray of hope and over 1300 points from the lows hit thereafter due to Coalgate, the factors that were behind that conviction still hold good – Resurgent heavyweights, government sweet talk and abundant liquidity.

The first two have already played out. While the government has walked its sweet talk, experts are already seeing allocations away from defensives such as FMCG and pharma to growth-driven sectors.

That leaves us with liquidity and at present, it looks like we are going to have plenty of that. It is never a great strategy to argue with liquidity. European Central Bank’s Draghi has announced unlimited bond buying. German courts have cleared a plan that enables the country help build a trillion dollar ‘stability’ bazooka. Across the Atlantic too, Uncle Ben has armed himself well. It was only shrewd for the government to capitalise on the global moves by letting the market hear what it so long want to hear on retail and aviation.

On Friday, alone FIIs brought in Rs 2,800 crore pushing up the rupee, triggering the virtuous cycle of fresh flows, rising rupee and better returns, we had hoped to return.

The Reserve Bank of India has also played its part by cutting the reserve ratio by 25 basis points on Monday. Thus, though Subbarao is yet to turn a hard-core dove like his Western counterparts, he has become less hawkish, which leaves something for the markets to look forward to.

Remember, India’s fundamentals were not the reason the Sensex fell off from the 20,000 cliffs, five painful years ago. It was more because our fair weather friends, foreign institutions, pulled the plug from under our nine per cent plus growth. They did it then because of their own troubles and not because of our mistakes.

It does not make any sense to talk fundamentals in this scenario. You will be shot down saying that market will discount what is going to happen two quarters from now. It is not good time to talk scams either. But, it’s not that bad a time to go out and make some money. It’s been so long…

A version of this article appeared on www.business-standard.com on Friday