26th December, 2011



Standing in the end of 2011 amidst all the carnage in the Indian and the global financial markets and economies, somehow, a famous quote by Winston Churchill keeps resonating in the mind, the quote goes something like this “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty”. Though we admit that the state of affairs that exist today all over the world, be it in terms of economic condition, political condition or in terms of share market performance are nothing to feel cheerful about and as we have explained in the ensuing paragraphs in this report, that there are lot of factors that points to the fact there are more pain yet to come, we feel that short term pains set stage for long term gains. We feel that for the next 6-9 month we are going to go through a turbulent time, and in the mean time we might see even lower level in the markets going forward. However, we feel as the market goes through this rough patch, we will witness a level of valuation that might not have been seen even in 2008 lows and that will create a base for a new bull market to start in FY13-14. Let us start our analysis from the recently concluded event, the 3rd quarterly review of the RBI's credit policy. The language and the expectation set by the RBI in the review have been in line with the economic realities and market expectation. The following table outlines the policy action of the RBI. Policy Action

The tone for the review was already set by the previous quarterly review wherein the governor indicated a rate hike pause after raising rates for the 13 consecutive times to tame the all-illusive beast called 'inflation'. Considering the current global and local economic situation the step that was taken by the RBI seemed justified then and today's action seems to reinforce the same. RBI has been demonstrating the fact that they are proactive in taking appropriate decision in pursuit of balancing growth and inflation. This is evident from the fact that the apex bank has decided to maintain status co while signaling the market that it has changed its long-standing stance of being hawkish to dovish. The evidence of this can be found in the last paragraph of the RBI press release where it has been stated and I quote “While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth. However, it must be emphasized that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.” As has been outlined in the earlier paragraph, the apex bank has taken cognizance of the recent data such as the IIP for the October (which came at dismal -5.1%, with capital goods showing contraction of upward of -25%), the HSBC PMI data (both manufacturing and servicing) and the Q2 GDP growth (which came at dismal 6.9%); all pointing toward a stark slowdown compared to the government and RBI estimation. As such, a pause and a dovish tone from RBI were on the cards. Our view on Dollar Movement against Major Currencies Re/$ Taking cognizance of the rapid rate of rupee depreciation against the US dollar, which hit a low of Rs. 54.30/$ on 15th December 2011, RBI took a decision to put a curb on the cancellation and rebooking of forex forward contracts and limit bank exposure in such contracts. The move is suppose to put an end to the speculative activities undertaken by the market participants to take advantage of the unidirectional move of the Re/$ exchange rate that has been continuing for last 2.5 months. In our opinion, while this move might curb the rupee's fall in the very short run, we feel the inner dynamics of the

eurekasecurities. However. the second largest. it is expected that its trade surplus would get wiped off in EUREKA RESEARCH 2 www. The capital formation to GDP ratio of the country stands at over 50%. which by the way are expected to remain strong.000 crore (or around $6. it can intervene in the market as soon as it goes beyond a particular level. Otherwise. The real condition of the bank balance-sheet is also not known for sure because they have not provided for M to M on account of sovereign bond/toxic loan losses. would have negative impact on the US economy via its bank exposure to the region. and we are all well aware of which direction Japan took post 1989. are going to witness many of their bonds worth billions of dollars maturing in the next 3-6 months. This reserve might be good enough to cover 9-10 months of imports to the maximum. However. higher than even Japan. if one goes by history no country in the world has ever been able to grow its way out through austerity and the current euro zone situation is not going to be an exceptional one in this regard. This data points to the fact that the RBI's ability to intervene even if it wanted to be more aggressive in doing so is pretty much limited with forex reserves at USD 300 billion.com . and also the US.e. during the course of FY'13. China's net export contributes only 5% to its GDP and the rest is contributed by the massive capital expenditure the country undertook in the form of construction of real estate assets. let us analyze this fact by turning our attention to the interventions made by the RBI in the forex market in the recent months. Well. Spain. The January 2012 meeting of EU is also not going to have much of an impact because as long as Germany is on board they are not going to let the ECB monetize or float Euro Bonds as the memory of Weimar Republic must be fresh in their mind. it is but obvious that conversion to equity is not going to be an option for the investors and hence around 24 companies (in BSE 500 index alone) would have to make redemption of such debt in US dollar. etc. Another point that one need to look at is the composition of the reverse. in turn. current account deficit and to a lesser extent.5-4 billion. which evidently is not sustainable. However. Moreover. apparently that did not help the rupee much as it depreciated 20% calendar year-to-date. RBI pumped in close to USD 3.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. the conventional stuffs like worsening balance of payment situation. 54/$'. so even if the banks were to be capitalized the quantum of money required to do so is not fully known. theoretically speaking. which clocked ~32% during their hay days. like a bad circular reference. for how long they would continue to borrow to refinance their old debt and meet the retirement benefits/social security burden and who would be willing to lend them are all open questions whose answers are hard to conjecture at this point of time. November 23 and 24. this phenomenon should take some more time to play out in reality. RMB/$ The condition in Asia. say Rs. led by China is not any rosier. Italy. FCCBs worth Rs.17 billion) are about to mature. infrastructure development and capacity creation in factories.. This would also be another major factor that would weigh heavily on the rupee in FY13. This. In this regard a skeptic would say. Greece. on two days in November. out of this $300 billion reserve. imports. and muted export due to lack of international demand are going to cast its spell on the rupee in the near term.. though a rough estimate of the bank exposure goes somewhere in the region of ~$18 trillion (source: CNBC). i. 33. This would trigger more downgrades from credit rating agencies and eventually translating into weaker Euro. the withdrawal of FIIs will continue to keep the rupee under huge pressure going forward. Under the current stock market condition where the current stock prices are trading anywhere between 1/5th to 1/9th of the conversion price agreed at the time of the issue of such instruments. standing at the threshold of depression. which cannot be sorted out. this depreciated rupee should increase India's competitiveness in the international market and hence would be supportive of the indigenous industries and should help narrow down the current account deficit going forward by boosting the country's export. With Western Europe. €/$ In addition to this. $88 billion is extremely short-term commercial debt with will be paid back in the next 3-6 months period. In the month of September RBI had intervened and bought dollars in the spot market to the tune of USD 800 million. with oil. China's largest trading partner. On top of this. 2011 macro situation that exists within the country such as widening fiscal deficit (which is expected to hit ~11% of GDP). 'RBI has $300 billion in reserve.. fertilizer and a pulses etc. we feel that the Euro debt problem is not getting solved any soon and the measures that are taken so far do not address the problem at its core. If that is not bad enough.

forcing financial institutions. This birth rate also includes immigration into the country. an estimated $20 trillion contraction of money in circulation is likely to take place.. contrary to the popular belief of conventional economists. which is comparable to that of Greece. this can be construed as “hard landing”. forcing it to rise against all major currencies in the world (and rupee is not going to be an exception.5% compared to over 9% couple of quarters back and consumer spending increasing by 2% (at the cost of savings and investment). however. 1) gold performs well in the time of inflation and not EUREKA RESEARCH 3 www. Repo etc. the crux of the matter is that we feel that Chinese Yuan is set to depreciate substantially in the years to come against US dollar. This will happen mainly on account of two reasons. its Debt to GDP ratio would stand near 200% of GDP. albeit with a 46 years lag. Under this kind of scenario. contrary to the popular belief that US dollar should weaken going forward. even prices of precious metals such as Gold and Silver are going to come under severe pressure. is miniscule and it is already evident that the longevity of the impact of successive QEs has been diminishing. as represented by the DJIA. excepting for agro commodities (where the demand remains inelastic and decreasing productivity. According to a study conducted by an eminent research house in the US. though the recent data suggest unemployment rate coming down to 8. www. As these excesses reduce through the curtailment of the government and private spending causing economic recession to set in. However. or through privatization of infra and real estate companies.com . having said that.com for details. the elevated demand for industrial commodities are going to come down substantially.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. the sustainability of such bump up is highly questionable. Thus. compared to that US per capita income as reported in 2005 was ~$46000. climate change. The best estimate for per capita income of China by 2050 is expected to be somewhere near $8500. Under this kind of circumstances. increasing urbanization and diversion of crops and cultivable area for bio fuel) whose prices in our opinion are going to remain strong. as the US dollar gets stronger. with numerous ghost towns and bridges to nowhere.hsdent. it is but obvious that an era of deflation rather than inflation would set in. would lead to melt down of property prices and in turn enhance NPLs and debt defaults for its banks and local municipal authorities going forward (the signs of which is already becoming evident). with consumption tapering off and a massive drive to deleverage keeping credit creation in the economy at bay. with empirical evidence. Era of Deflation has ushered in…… As has been discussed in the previous paragraphs that we are entering an era of a tough economic times where the debt fueled excesses are getting trimmed and general level of consumption. turning our attention to USA. triggering a massive slow down in factory output and hence capacity utilization. Now. they are not coming back to consume more goods and services going forward. A high degree of correlation has been found between these two aforementioned variables. 2011 next 2 years time. If one considers all the off-balance-sheet debt that China has accumulated and so far been very ingeniously camouflaging. By China's standards. when compared against only ~2. we do expect China to continue to grow at 6-7% over the period of next 2-3 years. This study mainly pinpoints the fact that the economic boom or bust is more influenced by the demographic trends rather than the government action. contrary to much popular opinion. These structural issues would not allow the country to grow its domestic consumption overnight. Thus. Thus.eurekasecurities. All these mean that US dollar is going to become “scares commodity” and the dollar demand all over the world would continue to rise. governments and hedge funds to park their fund in the safe haven of US treasury. This figure. we expect the US dollar would continue to regain strength as the debt destruction continues and as risk aversion continue to rise. and also triggering a monumental unemployment problem. On top of it. no matter how much they are allured by record low mortgage and interest rates. as the Chinese authority would try to prep up domestic consumption by cutting various bank rates like CRR. This means the economy and in turn the stock market. On top of this. Thus. that the consumption boom of the US is about to get over as the “baby boomers” (the group of people responsible for unprecedented spending) are on the verge of retirement and their offspring are already leaving the nest and now the main focus is going to be to repay their loans and build their retirement kitty. an outcome of debt fueled capital building. where the study involved in drawing a correlation between demographic trends with that of the Dow Jones performance. peaks after 46 years of peak birth rate in the US. which has been fueling the global growth since late 70's when Nixon officially abolished the dollar peg to gold and ushering in the period of unlimited fiat money. One can visit the website. one can very pragmatically expect that China does not stand a chance to emerge as a savior of the global growth any sooner. This study proves beyond doubt.5 trillion pumped in by the Fed through QEs.

as in the rest of the world. If that is the case. we feel that as the Indian economic condition worsens (provided the political stalemate continues. these companies have to come to the debt market to refinance these FCCBs. textile. Lastly. all these debt needs to be refinanced as none of these companies have enough reserve or cash flow generating capacity to finance them from the internal accrual. up from Rs 4. Interest rate parity also have some influence in forex rate determination. as well as the international industrial commodities prices are going to come down sharply. is also increasingly becoming a cause of EUREKA RESEARCH 4 www. This also is the only market in the world. it has been announced by the government that the treasury will sell a record Rs 4. While. Thus. construction. the subsidy on oil and fertilizer alone are expected to be off the charts. The reason is obvious. Already. Rate Cut by the RBI in Subsequent Policies? Looks Unlikely in the Near Term! While we expect that going forward. now with conversion not being an option. thanks to the rupee depreciation. in our opinion. liquidity crisis is about to unfold in India over the course of the next financial year. to what extent the fall in international commodity prices will be offset by the depreciating rupee is yet to be seen. Presuming. with rupee depreciating at such rapid pace. which. this is a risk. even though the cost of money has increased anywhere between 400 to 700 basis points. in Indian context. With the prospects of divestment under water and the twisted plan of using public sector companies' cash reserve to buy government stake in other PSUs not finding much support. has already been causing trouble for banking sector because of increasing NPL problem.17 lakh crore budgeted in February. However. in our view. 33000 crore worth of FCCBs are about to mature in FY13. any rate cut here onward is suppose to have further depreciating effect on the rupee even further.7 lakh crore worth of securities this fiscal. Thanks to sharp depreciation of the rupee (as majority of the funds supplied by the domestic banks to fund telcos to participate in 3G auction were borrowed from foreign financial institutions) and muted 3G uptake. 2) as the global liquidity shrinks. it is unlikely that RBI would take the risk of decreasing the interest rate in a hurry. the food price inflation. There are quite a few reasons based on which we arrive at this conclusion. the chances that these loans turning bad are increasing by the day. then we can pretty much expect a crowding out effect in the economy. the figure could go higher as well.com . the temporary euphoria in the bond market is likely to fizzle out. RBI would be reluctant to take. Secondly. translating in higher bond yield going forward. banks are going to see further deterioration in its asset qualities. RBI's reduction of rate would not have much of an impact. RBI has to rely on more price and exchange rate data over the period of next couple of quarter to be convinced about the fact that inflation has turned down for good. However. these companies have to arrange fund from the domestic market. for now. on top of that we now have a food bill to contend with. the government have little choice but to go for massive bond issuance. real estate etc. Contrary to the expectation. as stated earlier in this report. With the credibility of these companies already substantially tarnished. as we have stated above. and considering this scenario.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Thus. which is large enough to absorb such huge liquidity). Thus. would in turn mean further pressure on the liquidity in the domestic economy. sectors like power. the so-called export oriented sector. the government is expected to end this fiscal with a fiscal deficit of 11% (state and central combined) of the GDP. we feel that the government would have to enhance its borrowing programme in the next fiscal. Firstly.. Even the subscriber addition rates by telcos have dropped significantly compared to even a year ago. it is but obvious that the government is going to miss its revenue collection target. it is doubtful whether such fund could be arranged from abroad. However. 2011 deflation as it is considered to be good inflation hedge. with corporate profit coming under severe pressure on account of RBI rate action and forex related losses. the market participants are going to withdraw funds from gold (which can be considered as one of the very few asset classes that have been showing profit for all this time) and they either may sit with cash or put it in safe havens like US treasury (as this is the only asset class where investors are at least assured of getting their money back. even if we assume that of all the factors. On top of these textile and telcos are becoming a new source of worries for the Indian banking industry. at least in nominal terms due to the dollar's hegemony status. depending on the credit rating enjoyed by companies. Thus. at the risk of being too academic. the direction the domestic inflation will take is very difficult to ascertain.eurekasecurities. that Rs. at this moment seems to be the most likely scenario). the indication of that is already visible from the inverted yield curve that we are witnessing. Secondly.

Economy faced a recession after the First World War. but if we take a closer look at the history of major wars.M. can lead to violent social unrest. Let us illustrate this point with some examples. However. Pakistan to encircle India are all emanating ominous signs. This could infuse liquidity to the extent of ~Rs.eurekasecurities. As we have outlined in the earlier paragraph where we discussed about the Chinese economy and currency.F. the possibility of conflicts are going increase many fold. we are not in the business of prophesying. Even business and stock market are not immune to this phenomenon. Sri Lanka. The Second World War was followed by the Great Depression of 19291939. in view of these developments. if we turn our attention to the recent developments. eminent psychologists “human beings are inherently violent. nations or ideologies. etc. these companies are on the verge of a slowdown. racial groups.com .ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. recent riots in Britain. unrests in Middle East and North Africa. that's going to emerge as bigger threat to India if not the World. conflicts. we feel that a rate cut is not going to be an option for the RBI going forward for at least two quarters. As we all know. tides in the ocean. conflict in South China Sea. Hillary Clinton's visit to Myanmar etc. 36000 crore in the system. In this context.” Now. Italy. Even the international community has taken cognizance of this aggressive behavior of China and its desire to emerge as a super power. class war. Durban and John Bowlby. as loans get restructured and in some cases becomes bad over the course of the next financial year. This mixes with other notions such as displacement. The early 1990's recession again put US on the war front against the Iraq. creating naval bases in Myanmar. Occupy Wall Street. With demand in the western world shrinking thick and fast. a substantial cut in CRR is definitely on the offing. broadcasting anti India propaganda in Nepalese FM radio. be it weather. protests in Greece. This has certainly increased the geopolitical tension in the Asia Pacific region. which lasted for 3 years from 1918-1921. However. it needs the occasional outlet provided by war. While this violence is repressed in normal society. however. Risk of Heightened Geo-political Tension We feel that the current global economic condition is a perfect breeding ground for war like situation. one would find that during the time they all had a large proportion of young people in the overall population.. 2011 worry for the banks. we outlined why we feel that China is going to see a massive unemployment going forward. the magnitude of the liquidity crisis that is about to unfold is not very hard to assess. This if left unattended. vicissitudes in human life and so on and so forth. If one looks at the demographic characteristics of these countries prior to these wars. majority of them were unemployed and hence frustrated due to the lack of productive opportunities to vent their energy and off course for lack of ways to earn money. This gives them enough reason to vent this public frustration into full-scale war. The long depression of 1873-1879 paved the way for war between US and Spain and the First World War which lasted till 1918.there are very few occasions when world faced slowdown or recession after the wars. we are extremely wary of the fact that going forward it is going to be China and not Pakistan. all can be construed as a manifestation of this psychology. points to the factor that the US is monitoring the movements of the Chinese. To quote E. nature intended everything to play out in well-defined cycles. The repeated threat to India in terms of advancing in Arunachal Pradesh. if we look at the chart of the human population growth it has been on a one way up since 1348-50 (when around a 100 million people died on account of the so called 'black death plague' reducing total world population from 450 million to 350 million). 9000 crore released in the system for each percentage point decrease in the CRR. assuming a ballpark figure of around ~Rs. Spain. the present economic scenario presents an uncanny similarity as far as the economic and political environment that preceded those wars. Thus. with a potential to tear the social fabric of a nation. and we are definitely not in the camp of painting the so called “Doomsday” picture. even with such massive rupee depreciation. religions. Now. The war between US and Great Britain in 1812 followed the depression in 1807-1808. The following figure illustrates the point. there was war between US and France from 1798 to 1800. History shows that most of the wars have followed the economic crisis-. EUREKA RESEARCH 5 www. We feel as China slips to severe economic slowdown in FY12 and FY13. where a person transfers their grievances into bias and hatred against other ethnic groups. after the 1797's economic deflation. The recent visit of Obama to Australia.. We expect a CRR cut to the extent of 300-400 basis points over the course of next 2 years to be quite feasible.

energy dissipates. This occurs because a proton event vibrates the geomagnetosphere. or in other words. Electrical storms that frequent all planets with an atmosphere in the solar system have a cycle coupled with the sunspot cycle. Solar storms that are most frequent at sunspot maximum times will overload our power transmission lines due to magnetic induction. Are the Havens too conspiring Against Us? It Seems so…. At atmospheric level. oil pipelines are also negatively impacted. If not properly grounded. When there is a surplus of energy. some of it leaks down in the form of sprites above the atmosphere. It is interesting to note that the overall charge of lightning coming from above is positive. However. growth in human population has been practically defying this natural law of cycle. As proton storms and magnetic sectors intersect the magnetospheres of the planets.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. there is a possibility that the year 2012 might not be such a good one if one happens to own a satellite or a lot of shares in the electricity generating business. In view of this. Though these cycles manifest itself in a short cycle of 11 years and a full cycle of 22 years. as propagated by Thomas Malthus. primarily through the magnetic poles.com . showing first as auroras and then along the magnetic lines to the opposite poles. they build up charges measured in tens of kilo-amps. charges build in cloud forming regions and lightning is the result. and physicists are saying it's going to be an active one. Sunspots are regions of intense magnetic activity on the sun that are cooler than the surrounding photosphere. which often typifies years of a sun spot maximum era. 2011 From the figure above. which in turn induces current in power lines far in excess to what they are designed to carry. The question is what does “Haven” got to do with stock market. this tension causes the sun's magnetic field to snap. is repelled by the magnetic field much in the same way as aluminum is. With this occurrence causes the sun's magnetic field to fall in disarray. it is clear that since 14th century.eurekasecurities. Such an event occurred in Quebec in 1968. sun's magnetic field reverses causing a reversal in its polarity. this effect is not limited to electrical power lines only. That is because 2012 is being forecast as the peak of the next sunspot cycle. war and peace and economic boom or bust? Well it seems a lot. have used a new model of the sun's interior to refine predictions of EUREKA RESEARCH 6 www. They are cooler. a side spread wildfire can arise out of this. Researchers at the National Center for Atmospheric Research (NCAR) in Boulder. Massive electromagnetic wave can also cause untold damage to satellite and communication systems. while the lower regions closer to the surface is negative in keeping with the proton source of energy emerging from the sun. this time around scientists are predicting it to be an active one. which also affected the North Eastern part of the US. which will rupture the lines and ignite fires. We are alluding to Sunspots and solar flares. hot year. On a dry. Intense magnetic fields create "holes" in the photosphere. releasing a huge solar flare with proton storm and electromagnetic waves. Colorado. because the intense magnetic field literally pushes the fluorescing ionized hydrogen out of the way as charged hydrogen is diamagnetic. which produces the characteristic dark appearance of sunspots. Similar event happened in 1859 which destroyed all the telegraph lines in the US. The result is a black out when power lines literally snap from an overload. In the process.

ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Sunspot Heights since 1900 Even human psychology is not immune from sunspot activity. the scientists were able to determine that the sun's magnetic field has a memory of around 20 years. EUREKA RESEARCH 7 www. Joe H. number 24. Please refer to Annexure 1.com . and has led to revised predictions about the next cycle. There might not be direct causal relation but history of empirical evidence points otherwise. The high correlation between the events definitely points to the fact that there are more to this than meets the eyes. According to NCAR the next sunspot cycle will be between 30 and 50 percent stronger than the current cycle. By using data going back over a century. Allen. On the same note. which is a characteristic of progressed manic-depressives. Though unconscious for the most part. it has been observed height in sunspot cycle also seem to match major global events such as war and civil unrest. 2011 future sunspot activity.eurekasecurities. with a peak in activity in 2012. Even Psychiatrists have noticed that voluntary admissions to mental hospitals increase for two to three days after a solar-induced magnetic disturbance. Those may arise from all the other circumstances that arise at the time of solar maximum and/or the fact that we have a bio-electromagnetic field that would be influenced by such external stimuli. said scientists at the Kettering Magnetic Laboratory have found that geomagnetic disturbances may produce a temporary deficiency of calcium or lithium ions inside brain cells. This model was able to predict the past six cycles with around 97 percent accuracy. history of the species tends to show more agitation during sunspot maximum events than during solar quiet periods. attached herewith this report for details. Chief of the Solar-Terrestrial Physics Division of the National Oceanic and Atmospheric Administration.

the obvious question is with such valuation destruction already have taken place. Hence we have tried to use the same relationship between Sensex and gold price to make out a case for market top and bottom. how things are going to pan out in the future and where we can see the ultimate bottom.com . Sensex / Gold ratio: This ratio has been fairly accurate about market tops and bottoms The idea to use Sensex / Gold (LME) ratio came from the time tested Dow jones /Gold ratio relationship. Now. However.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. The Dow/Gold ratio calculation can be traced back to more than 100 years.. in the last couple of weeks. the earnings considered here are on TTM basis. In almost all occasions. Look at the identical nature of the 2 graphs for last 10 years. Dow jones tops and bottoms at predetermined level. the Indian stock market has established a firm trend and as we are all aware. many companies in the mid cap and in the small cap segment are trading below the 2008-09 lows. The million Dollar Question-How Far is the Bottom from the Current Level? After touching a high in November 2010. we thought. While. it is on the down side. JSPL. we try to find answer to such questions by applying both conventional and unconventional methodologies. this downward momentum has gained substantial steam. is there any room for more damage going forward. Jaiprakash Associates. compared to gold price.eurekasecurities. In the following paragraph. some companies. Sensex to Gold ratio analysis could be a good starting point. like BHEL. In this regard. are trading below the 2008-09 lows in terms of P/E and other valuation parameters. 2011 However. of course. etc. EUREKA RESEARCH 8 www. all said and done. The bottom has been around 1-2 for last 100 years. In this section we are trying to analyze and find some credible answer to this stupendously difficult question. we in the investment community are more concerned with the market movement.

then August-September. gold will not rise in future. Hence in worst case scenario. we may witness this ratio going down to about 7 in coming days/months before a powerful up move resumes in Indian market. multiplying gold at 1300 by 7-8 multiple points to Sensex level of around 10. Thus by this account. This does not mean that after correction. 2011. it peaked at about 21 in January 2000 and 23 in November/December. Higher the gold price. the Indian market has a tendency to find a firm bottom. Hence there is a very good chance that emerging countries like India will reward stock investors more compared to Gold investment. Indian markets have struggled to carry on the momentum. when this ratio hits around 9. Sensex becomes expensive. the moment Sensex/gold ratio goes up above 14-15 times. at the same level. gold can straightway come down to US$1200-1300. Thus Indian market stability also depends on gold price movement. But gold's rise will be more measured as many questions are raised about the counterparty risk of Gold ETF's. Lower the gold price. Likewise many emerging countries also look cheap when measured in terms of Gold. Thus at the worst case.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Gold price movement As the following graph shows. 2003. 2011 As the above graph shows. But not enough to call it a formidable bottom. 2002. Only in one occasion that is in March-2009 this ratio went down to around 7 before a superb rally commenced. As the gold also crashed a good amount after reaching life time high. it is perfectly possible that gold will see correction. On the other hand. though not exactly at bottom when compared to Gold. 2010. EUREKA RESEARCH 9 www. On the other hand. it is highly unlikely that only Gold is going to benefit. then March-April.000. at the same level. We believe that this level will be the ultimate bottom for Sensex for many years to come. Sensex is undervalued compared to Gold even on historical basis. gold is sitting on pretty borderline support. Sensex did become cheap. But when a liquidity crisis actually hits. Sensex becomes cheap.000-11. On the other hand. we have witnessed at least intermediate market correction.Gold has a tendency to do well when people rush to park money in so called safe assets when a financial crisis is foreseen. then January-february. This bottom was reached at June-July. The above two graphs strongly corroborate this. 2005.com . when this ratio crosses 14. If this level is breached by gold in coming days. then March-April. people tend to sell gold to meet so many objectives from meeting redemption requests to compensate for losses in other assets like equity and currency. then August-December.eurekasecurities. 2000. Hence as the Euro crisis gathers storm in coming days. As the above graph shows. Hence despite direct or indirect quantitative easing in USA or Europe. the ratio did a pretty decent job at predicting the end of a long term bull market rally. 2007.

At worst. multiplying with a P/E of 11 gives us a Sensex target of around 11000. EUREKA RESEARCH 10 www.This ratio was signaling alarm in the middle of October. But still we are not quite there despite such massive fall. In Indian context.com . That is not very far. 2011 itself when Sensex was recovering as it broke to new low. market bounce back has been sharp. BSE Midcap/Sensex indicates some more pain left before market rally starts (data updated till 21/12/2011) As part of inter market analysis.eurekasecurities. Let us consider the above graph of Sensex TTM P/E ratio for last two decades. But from these levels. it is useful to observe relative performance between two market segments to derive a message regarding market top or bottom.3 or a firm rising trend to indicate market bottom. Assuming TTM EPS of around 1000.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. it can go down to 11. This ratio needs to come closer to about 0. One of the popular inter market analyses is relative performance of midcap/small cap index compared to large cap index. we have tries to analyze BSE Midcap/Sensex ratio to see whether this ratio has indicated some sort of bottom . What is striking is that starting from 12/13 TTM P/E. Sensex starts looking attractive. 2011 Trailing TTM P/E ratio also points to similar level for Sensex at market bottom.

the market is going to present very interesting opportunities to invest for the long haul and such opportunities are going to present itself in the next financial year. it is advisable to take a calibrated approach and deploy small portion of the total investible fund into the market. FMCG/Sensex is a contrary indicator.eurekasecurities. 2011 FMCG /Sensex ratio too points to more pain before a firm bottom is reached Unlike BSE Midcap/Sensex. We from our side would try our level best to provide with the best investment ideas that we can. it is extremely difficult to pin point the exact bottom. Thus we end this report by wishing you “happy investing” for the next year. The ratio clearly pointed to Sensex bottom in February. While. Likewise in November. That means a top in this ratio indicates market bottom and a bottom in this ratio indicates market top. While we feel that there could be some downside left in the market.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Now this ratio has made new high compared to February. This means that final leg down in Sensex is not yet over. Please refer to the Annexure 1 of the report below Annexure 1 Early Solar Cycle Peaks: 1704-1770 Solar Cycle 1704-1706 Solar Cycle 1716-1718 Solar Cycle 1726-1728 Solar Cycle 1737-1739 Solar Cycle 3: 1777-1779 1776-1783 1788-1791 1789 American Revolution French Revolution US Constitution adopted Solar Cycle 4: 1786-1788 Solar Cycle 1749-1751Solar Cycle 1: 1760-1762 Solar Cycle 2: 1768-1770 EUREKA RESEARCH 11 www. while we might sound alarmist in the report. we do not rule out a sharp bounce back before reaching an ultimate bottom. 2009 high. Once this ratio starts coming down. 2010 itself the ratio signaled bearish mood by trending up. once we go down by another 5-7% from the present level. we can expect Sensex to stop falling further and rising again. Now.com . the fruit of which could be reaped in FY14. the idea that we are trying to present here is that bear markets should be considered a friend of serious investors and this kind of market presents the opportunities to make substantial wealth in the future. While we are advising not to start putting money immediately. 2009. 2009 inself before a powerful rally started in March.

Venice. 1861 American Civil War begins 1861-1865 Civil War in America. Virginia slave revolt. First Indian Congress meets 1883 Bottom year of a major depression in the U. Hottentots. Boer separatists occupy African lands. Opium War 1937 Major Banking Crisis in the U.eurekasecurities. revolt in Sudan. Vienna. Chile and Argentina declare independence. Switzerland.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Texas Independence.S. 2011 Solar Cycle 5: 1803-1805 under 100 wide (1802-1806) 1803-1806 Napoleon conquers Europe Solar Cycle 6: 1815-1817 under 100 1815-1817 Two wars to defeat Napoleon. Brazil. Belgium. US Mexican War starts. Milan.S. Budapest. Solar Cycle 9: 1847-1849 1846-1848 1848-1851 Mexican War Revolts and revolutions in Poland. Naples. the Black underground railroad begins Solar Cycle 8: 1836-1838 1837-1840 Constitutional revolts in Canada. China Solar Cycle 11: 1869-1871 wide 1869-1872 1869-1870 Franco/Prussian War 1869-1872 Paris Revolutionary Commune Solar Cycle 12: 1882-1884 under 100 1883-1886 Big US labor strikes. Taiping Rebellion starts Solar Cycle 10: 1859-1861 under 100 1858 Bottom year of a depression in the U. Turks. Warsaw.S. Paris. Italy. slavery debate outlawed in US. Solar Cycle 7: 1829-1831 under 100 1828-1832 Revolts in Turkey.com EUREKA RESEARCH . Cuban revolution Solar Cycle 14: 1905-1907 under 100 1904-1905 1905-1908 1905-1908 1908 Russo-Japanese War first revolts begin in Russia Widespread strikes. English and Serbian riots. Indians. Honduras Bottom year of a short depression 12 www. France. Mexico. Prague. German. Solar Cycle 13: 1892-1894 under 100 1893-1895 Zulu revolt. revolts in India. revolts among German miners. Britain. Berlin. BritishAfghan war. Poland.

Germany and Japan start World War II US steel strike Solar Cycle 18: 1947-1949 wide 1947-1950 1946-1949 Greek Civil War. Vietnam revolts 1947 – Flying saucer sightings begin. Kennedy “race to the moon” begins Solar Cycle 20: 1967-1969 stumpy wide 1967-1970 1965.eurekasecurities. 1927-1931 Mussolini and Hitler build power on economic unrest. Czechoslovakian uprising/USSR invasion. 2011 Solar Cycle 15: 1916-1918 just barely 100 1914-1918 First World War 1916-18 Irish and Indian revolts 1917 Russian Revolution 1919 The Atom is Split Solar Cycle 16: 1927-1929 under 100 wide 1926-1929 1927-1929 Fabled American Bull Run ends in crash of the stock market in long slow slide which bottoms in 1933 1926 Hitler in jail for NAZI’s attempted Munich Putsch. formation of Red Army. civil rights movement begins in US. Cuban revolution. begins writing Mein Kampf which outlines how he will lead Germany to make the world’s greatest power. Iraq revolt. India-Pakistan riots. Red Army wins China. NM. Spanish Republic formed.com . “shadow” 1948 government is set up inside the military industrial complex with the CIA to fight communism and hide the remains of ET 1948 Gandhi assassinated.1967 1967-69 Haight-Ashbury Flower Children launch the hippie movement Height of Vietnam War. peace demonstrations. mass civil disobedience in India launches Ghandi’s campaign to free India Solar Cycle 17: 1936-1938 wide 1936-1939 1936-1939 1937-1940 Spanish Civil War. Israeli Arab war. revolt in Vienna and China. US inner city riots. 1957 Vietnam War begins 1958 Eisenhower recession 1960-1961 Eisenhower warns of the danger of “shadows” in the unfettered military industrial complex. first big anti-war marches in US. worldwide student uprisings. First public men on Moon 1968 1969 EUREKA RESEARCH 13 www. saucer crashes in Roswell. Martin Luther King and Bobby Kennedy assassinated . French-Algerian war. Hungarian uprising. MauMau revolt.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. first US inner city riots. Israel’s War for Independence 1950-1953 Korean War Solar Cycle 19: 1956-1958 huge peak wide 1956-60 1957 1960 – Israel invades Sinai. Woodstock and height of hippy movement.

Tamils rebel in Sri Lanka 1979-1980 US Bid to Rescue Hostages Fails 1980 Iran-Iraq War begins (lasts until next peak in 1988) 1981 President. Sandinistas lose Nicaraguan elections Mandela Released. Sadat of Egypt assassinated 1982: Israel Invades S Lebanon. multi-national forces liberate Kuwait from Iraq.com . dismantling of Berlin Wall. 1990 1990 1991 EUREKA RESEARCH 14 www. anti-nuclear and peace demonstrations increase worldwide. USSR begins pullout from Afghanistan Crash in World Stock Markets Tianamen Square Chinese student democracy movement crushed Protest and peaceful revolution in Eastern Bloc. Eastern European dissidents organize. US invades Grenada. Zimbabwe gains independence. East and West Germany Re-Unite Iraqi Troops Invade Kuwait The Gulf War.eurekasecurities. USSR invades Afghanistan. Balkan Civil War begins as communist Yugoslavia collapses. Falklands War. Iraq-Iran war begins. Communist Party coup in Russia fails End of apartheid in South Africa. Glasnost process begins dissolution of Soviet Union. USSR & US sign missile treaty. Shah of Iran overthrown. Sandinistas oust Somas. Falklands War 1982 Reagan recession Solar Cycle 22: 1988-1990 wide 1988-1992 1987-88 1987 1989 1989 1989-1992 1989-91 Palestinian Infiltada begins. beginnings of patriot and militia movements in US. Carter Camp David Accords between Israel and Egypt 1979 Three Mile Island Nuclear Plant leaks radiation 1979-82 Polish Solidarity begins. end of Communist Party domination. 2011 Solar Cycle 21: 1978 1980 wide 1978 1982 1978 World’s First Test Tube Baby Born.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. US aid to “contras” in Nicaragua. US anti-tax movement reaches heights and elects Reagan. Yugoslavia begins slaughter in Bosnia. Somalia civil war.

1. Quebec City. Kolkata . : : : Kinshuk Acharya & Samudrajit Gohain research@eurekasecurities.com Mumbai Office : 909 Raheja Chamber. worldwide protests against WTO/IMF/World Bank in Seattle. Eureka Research will not be responsible for the consequence of reliance upon our opinion or statement contained herein or for any omission. All estimates and opinions in this report constitute our judgement as of this date and are subject to change without notice.ECONOMIC & MARKET OUTLOOK FOR 2012-13 26th December. Any feedback can be mailed to the following ID. President made by judicial interference.com 91-33-3918 0386 . Washington DC. Supreme Court intrudes in the U. Mumbai-400021 Phone : 91-22-2202 5941 / 5942 e: mumbai@eurekasecurities.700001 Corporate Office : B3/4. 2001 Attack on World Trade Center and Pentagon. 1999 Worldwide Y2K Scare 1999 Palestinian Infiltada re-commences after “virtual agreement” with Israel 2000 Dot-com bubble breaks. drive people into camps in West Timor. elections.700001 Phone : 91-33-2210 7500 / 01 / 02. Kolkata . 2011 Solar Cycle 23: 1999-2001 wide 1999-2002 1998-2000 Peace treaty in Northern Ireland.87 Registered Office : 7 Lyons Range. throws results of Florida vote to make the loser of the popular vote into a winner of the electoral vote to become the U. 8 N S Road. militias burn East Timor. Room No.com . India-Pakistan skirmishes over Kashmir increase.com PRINTED BY : www.abhishekcolors. rising religious strife in India and Indonesia. Genoa and other cities 2002-2003 Bush diverts War on Terrorism into personal vendetta against Saddam Hussein.S. Goteborg.9830005273 EUREKA RESEARCH 15 www. Serbian-KLA conflicts increase and US/ NATO decides to “resolve” conflict through massive bombing of the whole nation. land confiscations in Zimbabwe. Fax: 91-33-2210 5184 e: helpdesk@eurekasecurities. massive protests demonstrate against Iraq war Solar Cycle 24: 2012-14 Consequence ???????? Source: http://kondratieffwinter. overthrow of Milosevic in Serbia. increasing civil war in Sierra Leone and Sri Lanka. Prague. 3rd Floor. Analyst Email Ph. big demonstrations at WTO meeting in Seattle.eurekasecurities. 213 Nariman Point.com/blog/esoteric/sunspots/ DISCLAIMER : The information in this report has been obtained from sources.S. War on Terrorism begins 2000-02 Peace treaty disrupted in Northern Ireland. but we do not hold ourselves responsible for its completeness in accuracy. which Eureka Research believes to be reliable.com . Gillander House. 2nd Floor. overthrow of Indonesia’s Suharto.


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