The Roller Coaster

Global markets have been on a roller coaster ride like never before since
2005. The period 2005-07 saw us climbing high, with occasional minor drops which
helped gather momentum and added to the thrill, all along.

Pushed hard by FIIs, DIIs, HNIs, Hedge Funds, momentum players and retail
investors the roller coaster made a big steep climb all the way to 21000 by
early January 2008. A level that needed a lot more momentum to cross, which the
system could not provide. And that led to a steep decline, all the way to 8000.
While all bulls were gasping for breath, the roller coaster hit a bottom and
started climbing again.

This time the climb was propelled initially by DIIs, hedge funds and an
unprecedented election outcome. Soon enough FIIs and ETFs joined in gleefully.
Any surviving HNIs and retail investors, looked skeptically at the slope ahead
and felt that it was too early to have a big rise again. And so they sat, to
watch the gyrations around 16000 to 17000 levels, each thinking that the ride
was almost over. However, now almost everyone can see one more slope ahead, and
wants to enjoy the thrill of being on this one.

So where do we stand on this one?

Practically everyone who was riding in 2007 is back to enjoy the ride. The
one missing participant since the last descent from 21000 has been the retail
investor. Volumes and momentum have been built selectively and pockets of
opportunity are visible amongst mid-caps and sectors that have either not
performed or have burnt out in this rise. The stage is hence set for the retail
investor to enter.

The Global Backdrop US Dollar

Currency markets have been pretty volatile right through 2009, with the
Dollex (Dollar Index) moving up from a level of 79 in mid-Jan to a level of 89
by March'09 and then moving down steadily to a level of 75 recently. A
breakthrough from its 50 DMA will give strength to the Dollar, while a fall
through 74.5 levels might quickly take it to 71 levels. The Dollar's strength
will bring down markets & commodities, while weakness will give markets the
strength to break out of their current range-bound scenario.

Bail-outs

With the Fed having pumped in at least $1.7 trillion on several bail-out
packages and governments across the globe having followed suit with varying
amounts, there are plenty of funds in the markets chasing limited number of
assets, leading to what is commonly being referred to as the asset bubble.

Interest rates

With the Fed bringing down interest rates to near zero levels, the weak
Dollar is also chasing assets that can provide returns over a short term. Since
the fall in the Dollex starting March '09, stock markets globally have been
attracting a lot of investment and have turned in phenomenal returns in excess
of 50 percent already. Considerable funds have also flown into emerging markets
and commodities.

Commodities

With the flow of excess liquidity in global markets, commodities have risen
sharply, even though industrial recovery and consumption have yet to turn up
significantly. Crude on the other hand that rose from $35 to $82 per barrel
levels, has lost ground owing to a slack demand and an inventory build-up in
western markets. Metals and bullion have however commanded center-stage in the
commodity price rise. Gold & silver, however, continue to look attractive both
as an investment and insurance. Also, several Central Banks including the RBI
clearly intend to bolster their gold reserves, in order to protect their
currencies from further devaluation.

GDP growth

India surprised the world with its 7.9 percent GDP growth rate for the
second quarter (July-Sept '09). The US is trying to tell the world that it is
out of its recession (a fact that it did not concede till 6 months after it was
in one). Australia & Norway have started increasing interest rates, signaling
that their woes are now a thing of the past. China's jugglery of figures and
balance sheets remains, as it continues to give messages to those within &
outside that all is well. The question here is that once the interest rates are
raised & liquidity pulled out of the system, will there still be any real
growth? Guess we need to wait another two quarters (at least) before we are
clear that we are not in for any unpleasant surprises again.

Inflation

With the masses having lost a record number of jobs and a majority of their
savings, this is not the time any government would like to battle inflation. The
food index has shot up dramatically since 2007 even though the WPI and CPI are
not looking alarming, as yet. If inflation is to be controlled, then liquidity
and low interest rates that help in industrial recovery will have to be put on
the back-burner for a while.

The Year Ahead

Fasten your seat-belts and prepare yourself for 2010. If you thought that
the roller coaster ride was over, think again!

I somehow can't get over the striking similarity between the same time in
2007 and now. Markets were continuing to rise way beyond reasonable valuations.
Everyone was planning to raise funds from FCCBs, GDRs and IPOs. There seemed to
be an excess of liquidity chasing certain stocks. Retail investors were entering
the markets having either sold out cheap earlier or having waited too long for
the right market signals.

Yet, there are subtle differences between then and now. While real estate was
the success mantra in 2007, in 2009 it found few takers, despite improving
business between 15 to 30 percent. Realty shares are down to a range between 20
to 35 percent of their 2007 highs.

Gold and Silver were largely ignored by investors in 2007, while in 2009 most
investors participated in their rise and using them as a hedge against inflation
and devaluing currencies, in one form or the other.

This time markets have been selective in their rise, with specific industries
having moved up simultaneously, while others have largely been range-bound;
unlike 2007 when the Nifty 50 or the Sensex 'A Group' (large-caps) scrips moved
mostly in unison. The mid-cap universe is beginning to leave the large-caps
behind now and I guess as soon as the retail investor makes good use of the
time, the small caps would put in record gains too.

I believe that the 'Sell the Dollar/Go Long Everything Else' trend is in the
process of reversing. And thereafter, you have the inevitable fall...

Please sharpen your senses if you have invested in any asset class or intend
to do so. Use your discretion and intelligence and consult the world including
your financial advisor before you take any investment decisions. Better still,
wait another year if you have not invested anywhere as yet. Stocks would only
get cheaper and maybe you will be happier if you did not get on this financial
roller coaster.

Amen!