Is the Greece issue Resolved? What next

Unless you are were too busy celebrating Deepawali to read the news on the Web or on TV, you would have known that finally after months of wrangling, the European Union has reached a agreement with the lenders of Greece wherein its been decided that the Investors will take a hit of 50% with the rest being taken care by the ECB.

Markets across Europe and US are up strongly at the moment. SGX Nifty seems to indicate a strong positive opening for our markets as well tomorrow (that is if US for some reason or the other doesn’t tumble overnight). So, the question is, Is the problem really over & if so what one should do next.

For the past several months, I have been bearish on the overall Indian Markets or a variety of reasons and one important reason was the European Crisis. I had emphasized that how the Greece situation is resolved will hold the key to how we will move forward and how we should position ourselves.

While the Indian Markets are still strongly bearish, over the last few weeks, markets seems to have bottomed out accompanied by huge bouts of volatility. A strong move can take us to the first strong resistance level of 5350 which also happens to be around the 200 day EMA for Nifty with any further rise providing us with a test of the 200 MA which lies around 5420 level.

The question is not whether we will break it. We may, we may not. The larger question to me is how do we position ourselves and what can happen next. Personally I am a trend trader & do not care about long term trend forecasting. But its important in my opinion to have a view on the long term path so as to ensure that we are rightly positioned in everything other than trading.

While the Greece issue being lets say put off for the time being, the focus will now shift to the other countries for whom borrowing from the markets have become pretty expensive – Italy for instance and how will they try to come out of it. But for those of us who trade the Indian Markets, I believe local issues will take the limelight for the time being.

Alongwith the hike in Interest rates, the RBI freed interest rate on savings account. This will have a strong impact on the balance sheets of every bank (other than a couple of banks like Yes Bank which have never targeted the retail segment very much). The impact will be felt more by the PSU Banks since they have enormous amounts available to them at the cheap rate of 4% and one which they can lend at much higher rates.

Even a 1 – 2% increase in rates (which will happen for certain) will have a very bit impact on the profitability of the banks and hence in a way should lead to Banks not joining the party (or rather not having the kind of party they had in 2010 for instance). This is infact already visible on the charts with Bank Nifty starting to underperform Nifty while Reliance which was a underperformer for more than 3 years now coming on its own finally.

I believe that while the market may get into the initial euphoria of the global boom, local realities should at some point provide a kind of resistance and then set stage to the return journey. The constant increase in interest rates are already having a impact, but much bigger impact will happen once its dribbles through the layers. Another big issue is the overshooting of the Government expenses resulting in greater borrowing. This can actually push up the interest rates still higher since Banks are always more comfortable providing loans to the government as against providing loans to business. 

One of the ways being explored (as I read from the papers) is that since there is no way to disinvest PSU ‘s, idea is to sell stakes held by the Government (when it saved the unit holders of US-64) of various companies so as to mop up the difference between the targeted disinvestment proceeds and actual proceeds.

The problem of Inflation too is not (again IMO) expected to come down anytime soon. Crude has remained stuck at high levels and since the government will be unable to lower fuel prices anytime soon. Minimum Support Prices are being hiked and this in turn will again have a impact on Food Inflation which is nearly stuck above the 10% level for month together now.  

After a pretty long time, India is facing problems with Labour as well. This has already impact Maruti and a couple of other companies and can if not solved by way of reforms spiral out of control. 

So finally, the important question. What to do now and what to buy. 

I believe that even in bear markets, there are always pockets of out performance. For example, despite the constant hike in Interest rates and how that would impact the Automotive sector, stocks like TVS and Tata Motors have done decently well for themselves. There are then counters like Gitanjali Gems & Hero Honda where looking at its charts, its difficult to believe that markets have been bearish for some time now.

But I would not be in a hurry to be a long term bull for the Indian Markets since there are various macro problems that remain unresolved and that should pull us back from any upmove coming as a result of removal of certain global uncertainties.

Prashanth