Market Analysis Feb2014

The US Fed QE tapering and its potential consequences have kept the global markets busy over the last 2 weeks. If the US Fed QE taper continues on its planned path, we may see higher interest rates in the USA by July 2014 along with US Dollar appreciating against other currencies of the emerging markets.

It will be a very challenging task for the Emerging Markets (EMs) to keep their currencies stable in the face of QE tapering, because its difficult to estimate just how many billions USD will move back from emerging markets back to developed markets like USA in this process.

Countries like India may be forced to raise interest rates to control inflation and keep the currency stable, even though it will further hurt the domestic economy of India, and put downward pressure on Indian GDP growth.

It is also possible that in light of rapidly rising interest rates, the US Fed may slow down the QE taper after a few months, but by then enough damage may have happened in the global markets, through large currency moves. So we will approach the markets with great caution till June-July. If sharp corrections take place in the coming weeks, we may decide to buy some index ETFs based on how those levels have arrived.

For Feb 2014, we will work with Index levels mentioned below.
1. USA: S&P500 Index – As per previous notes, we have exited our long position on closing below 1820. Downside targets of 1650 and 1570 are there as mentioned in previous newsletters. So a large correction is possible here. We will buy again only on closing above 1850, or at a much lower level like 1570, which is yet to be finalized.

2. India: Nifty Index – We will remain long above 6180 and exit on closing below this level. Nifty is poised for much higher levels by Dec 2015, which is just 8 quarters away, so we will buy all major corrections from now onwards, especially at Nifty 5450 level.

3. Hong Kong: Hang Seng Index – We will buy on closing above 23,150 and exit on a closing below 23,000. However, it is possible that we may see lower levels first, and we may revise our buying point to a lower level after 3-4 weeks.

4. Cash/Gold – Holding cash as Gold, with 20% portfolio in Gold.

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