January 2015

Supply Shock

It was a great beginning for equity markets in 2015 till we hit a supply shock. Taking advantage of the positive sentiment prevalent in the market, the government decided to divest 10% of Coal India worth 23,000 crores. This was followed by Rs. 10,000 crores equity raising by HDFC Bank. These two fresh papers sucked out liquidity from the secondary market. This created an intermediate top for the market and allowed shorts to initiate position. A fresh supply of Rs. 20,000 crores is expected through disinvestment programme by the government which will create further pressure. Bad quarterly results, weak global markets and BJP’s loss in Delhi election also helped shorts. Many of the high quality stocks corrected in this environment and our fall in valuation was in line with the market.

The current fall in the market will help in creating a strong base. This will also help markets to cool down after a great run in the month of January. The supply shock has made bulls weak in the market and it may take a while before they gather strength. We don’t expect any supply shock for nine months following April -15. This will help markets to gradually move upward and few of the companies will be able to take advantage of fall in commodity prices and deliver strong quarterly result. We would urge our clients to take advantage of the current correction and build position in equities. We expect the next two years to be rewarding for equity investors.

Regards,

Vinod Jain