With Sensex at 25,000 level, investors should tread cautiously

With the BSE Sensex scaling a new all-time high and crossing the psychological barrier of 25,000 , some sort of euphoria seems to have pervaded the market. But be careful: some fraudsters are taking advantage of the euphoria, trying to lure investors and dupe them of their savings.
 
In the past few days, there has been a rise in short messaging service (SMS) from unknown numbers giving free advice to trade in certain stocks and make 25 per cent return in a week and double the money in one month. Another lot of bulk SMS from HBJ Capital even guarantees assured returns of a minimum profit of Rs 15,000 to Rs 30,000 for a fee of Rs 1,999.

Another way of luring investors has been mobile messaging application like Whats App. Messages like, 'Every 10 years the Sensex has jumped six times and making that assumption the Sensex will jump over 100,000 by 2018.' They may not be completely off track, but raising unwarranted hopes is always dangerous.

Indeed, there has been hope even among the captains of India Inc that India under Narendra Modi is going to be pro business, pro-growth and pro-reforms. There is a feeling that with Modi coming to power he will replicate the Gujarat growth model in the whole country by reviving demand and investment and putting growth back on track. More than that, he will be active, unlike the previous UPA-II government which did very little for the major part of its second term in office. The reason: it was fighting off allegations of corruption and fraud.
 
Meanwhile there is nothing wrong in having a positive outlook, but first the new government has to act. Even if Modi takes the right steps it will take at least 12 to 18 months for the economy to come back on track. A lot also depends on global factors (US and Euro zone) as well as the environment (monsoon). Barring having a stable government at the centre, things on ground have not changed. In the past three weeks nothing much has changed barring expectation that the Reserve Bank of India (RBI) may not raise rates, which are already high due to high inflation. Therefore investors should be cautious as everything in the equity market has surged and even dud and penny stocks have become multi-baggers. The rally has been predominantly in mid-cap stocks. The mid-cap index is still 11-12 per cent lower than its previous high of 2008. Similarly the small-cap index is down 31-32 per cent from its 2008 highs.
 
Developments on political front have to be closely watched as Finance Minister Arun Jaitley has started his budget-making exercise. It would make sense to wait for the budget which is slated to be announced next month in July 2014. Future course to be decided by the budget and then accordingly investors should make investment decision.
 
Meanwhile in the current week, the government will announce the April industrial production (IIP) data and May consumer inflation (CPI) data which is scheduled to be released on June 12, 2014.
 
We have been maintaining that the RBI's hands are tied. Though it has said it will not raise rates, it can't even reduce key policy rates beyond 50 to 75 basis points as it has to keep a comfortable interest rate differential for foreigners to invest in India. Foreign institutional investments (FII) compared to foreign direct investments (FDI) is still dominant in India. Second, with the US quantitative tightening on track and the US Federal Reserve's decision to increase rates by the middle of 2015, the RBI will not have room for a drastic rate cut. In fact, if US increase rates, every country including India will have to increase rates.
 
On Friday, the job market in US returned to its 2008 peak with unemployment rate at 6.3 per cent. This will give confidence to the Federal Open Market Committee (FOMC) that meets on June 17 and 18. Last time when the Fed met on April 30, 2014 it reduced its monthly debt purchases by $10 billion to $45 billion. If the Fed goes as per plan then by the end of the year the quantitative easing (QE3) program will come to an end which can see outflow of money from emerging markets to developed market.