The Assembly election results came yesterday and as expected NDA-led by Mr. Narender Modi delivered
victory in three states and the fourth state had a single largest party. This election result would definitely
be taken positively by the equity markets. We see upward bias both on Indian equity and currency. In the
short term, market had been expecting a change in government and; opinion polls and assembly election
results showed continued strength for BJP. We would expect the equity markets to continue to react in a
positive way. We also expect that FII inflows would continue over the next few months. As of now, we
continue to maintain our equity market target for March 2014 end of 6740 on Nifty. Analysis shows that
the average returns in the six months post the last seven general elections have been ~15% in equity
markets. Thus, equity markets generally tend to move up in the run up to general elections and we
believe this time would be no different. We are a strong buyer of Indian equity at this point in time and
we continue to advise investors to increase the allocation to equities. We believe the participation in the
current rally would not come from large cap stocks only but mid cap and small cap stocks would also start
playing catch up. We have seen mid and small caps underperforming Nifty to an extent of 40-50% and we
believe some of this underperformance will be rectified in the times to come. By saying that we are
positive on Nifty, we do not mean that there will be a unidirectional move. The only thing we can say
from a downside point of view is that equity markets are not expected to sustainably fall below 6000 on
nifty hence we believe that too much downside is not there and every dip of 4-5% should be used as a
The US Non Farm Payroll data came on Friday at 203,000, which has definitely surprised the markets on
positive. The US GDP growth last quarter has been revised from 2.8% to 3.6% which shows that growth in
US is becoming broad based and stronger. All this has led to fears that the US tapering will happen
sooner than expected. We don’t expect the tapering of QE to begin anytime before the end of February
that is when the fiscal issues in US are supposed to be addressed. So in our view, the easy monetary
policy is expected to continue in the US until further clarity on fiscal issues is there. If the easy monetary
policy which means that negligible or zero taper till March continues, we would expect the equity inflows
to continue in India and other emerging markets which would be positive for Indian equity and currency.
The cost of production for 1 ounce of gold is around $1200 and we have seen in the past that each time
prices were at these levels, there was a decent up move. The US debt ceiling issue will come back during
mid-Jan again. Last time when S&P downgraded US following the debt ceiling issue, gold made an all time
high peak of $1921 an ounce during September 2011. And, two years later the world is still talking to
resolve the US debt ceiling matter and this time gold is down 36% from its peak.
The Comex registered gold stocks fell to new low and claims per ounce of gold were at record 69! – This
means for 1 ounce of gold, there are 69 buyers claiming it. This is apathy of fractional reserve system and
Cyprus Bank run is a classical case for this argument. NY Fed told Bundes Bank that it will take 7 years for
them to repatriate their (German) gold. It is the leverage in fractional gold reserve system that has
already reached a record high of 69 (and increasing at an alarming rate) and would shake up the entire
world in case of failed deliveries; at that time, its impact on price of Gold is beyond imagination. It is quite
Interesting to note that China has relaxed its gold norms. Chinese Central Bank and Chinese are
accumulating gold at a run rate never seen before. Clearly they have sensed the danger and accumulating
gold as much as they can while diversifying from their greenback holdings.
There is too much pessimism on gold today and it is a clear indication of an inflection point. With zero
rate policy of the US Fed and raising bond yields in US (2.75%) and in India (9.10%), inflation expectation
is building up as implied from these bond yields and are far from subsiding. Given these arguments, it
seems the downside in gold is limited and any dip should be bought as gold is expected to come back
strongly. Smart investors (like Chinese) are accumulating gold at every dip.
The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, nudged up to 47.2 in November
from 47.1 in October.
India’s net direct tax collections in the eight months ended 30 November rose 14.6% to Rs.3.1 trillion, less
than half of the annual budgeted target.
India's steps to support its currency, including a curb on gold imports, helped to narrow the current
account deficit in the September quarter to $5.2 billion, or 1.2 percent of GDP -- the lowest since the June
quarter of 2009.
The Bank of England left monetary policy unchanged, sticking to its commitment to keep interest rates at a
record low 0.5 percent until Britain's recovery is more firmly established.
Britain has had a surprisingly strong recovery since the start of the year, overtaking its euro zone peers to
become one of the fastest-growing advanced economies in the world with annualized growth in excess of 3
Britain's services PMI fell to a still very strong 60.0, its fifth highest reading since December 2006 - and all
of the better ones have been since June this year.
U.S. employers hired more workers than expected in November and the jobless rate hit a five-year low of
7.0 percent, raising chances the Federal Reserve could start ratcheting back its bond-buying stimulus as
soon as this month.
Factory output growth is seen slipping to a four-month low of 10.1 percent in annual terms on November,
the median forecast from 22 analysts showed, from October's 10.3 percent.
Export growth, which has whipsawed this year, is seen quickening to a three-month high of 7.1 percent
from a year earlier, up from October's 5.6 percent and a sign that external demand may be improving.
Sensex Midcap Auto Bankex
2/12/2013 20,898 6,377 12,378 12,878 5,746
3/12/2013 20,855 6,392 12,325 12,806 5,713
4/12/2013 20,709 6,350 12,196 12,733 5,716
5/12/2013 20,958 6,358 12,242 13,298 5,737 10,197 6,364
6/12/2013 20,997 6,389 12,297 13,364 5,809 10,279 6,382
0.47% 0.19% -0.65% 3.77% 1.09% 3.06% -2.82% -1.86% -0.34% 2.24% 1.33% 4.17% 0.20% -0.12%
Commodities and Currency:
Gilt Yield in % (Friday)
Change in bps (Week)
(Rs. per BBL)
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