Indian markets have rallied significantly, supported by unexpectedly positive election results, better GDP numbers and better than expected Purchase Managers Index (PMI) data. Global markets have also supported the momentum, and FIIs have invested aggressively in the month of May.
However, we believe that liquidity is chasing stocks and hence at 16.5x forward earnings, Indian markets are looking overbought. In our opinion, this euphoria is not likely to last for long as markets seem to be expensive, trading higher than 10-year average of 15x. Indias foreign trade data presented a dismal picture in April, with both exports and imports declining by 33.2 per cent and 36.6 per cent respectively in dollar terms.
This is a good time to book profits into the market as one could expect a 30 per cent correction in mid caps and small cap stocks and a 10 to 15 per cent correction in frontline stocks. However post this correction period we expect market to consolidate and become very stock specific. As in any tide every thing floats - we have seen all mid and small cap companies have moved up during the current rally.In the next rally we would see selective buying in stocks where there is value and growth and hence men would be differentiated from boys.
Hence the outlook for the near term remains bearish and at the moment it is selling on strength strategy with expectation of 13500 to 13750 on the Sensex.
Globally, General Motors filed for bankruptcy on Monday, forcing the 100-year-old automaker, once seen as a symbol of American economic might and dynamism, into a new and uncertain era of government receivership. The bankruptcy filing is the fourth-largest in the US history and the largest ever in American manufacturing. The decision to push GM into a fast-track bankruptcy, and provide $30 billion of additional taxpayer funds to restructure the automaker, is a huge gamble for the Obama administration, in our view.
The immediate impact is that companies like Toyota and Honda would gain market share as it is up for grab. Markets have discounted the GM bankruptcy well, as following the news market actually moved up. Dollar is losing value, as DXY index is suggesting, and risk appetite has increased, resulting in the rally in commodity prices. China is stocking up commodities, esp. Oil, and copper, iron ore. UK sovereign ratings have been downgraded, and there is apprehension of similar fate for US sovereign rating as well, resulting in yield on 10-year bond spiking out.