07
Jun
11

Slowing China – Biggest Risk in writing Calls in Indian market

India is an evolving market and will continue to do so over the next 20 years. Foreign Institutional Investors (FII‘s) continue to dominate Indian market and their inflow continues to decide its direction. Last year, when FII’s pumped billions of dollars, market went up but this year when inflows are not so strong market is struggling to go up. Not many people invest in Equity markets and Mutual fund. The biggest problem I think, is the lack of stable long-term pension money. But over long-term with or without FII money Indian market will continue to go up and you don’t need any kind of BRICS marketing gimmick to confirm that. Structurally, we are in a bull market for next several years, but within that we will continue to overshoot and undershoot our long-term mean valuation of 15 PE. As option writer, I keep waiting for these overshoot and undershoot opportunities.

Last sunday there was an article in Business standard on slowing Chinese economy which might lead to sharp correction in commodities. http://www.business-standard.com/india/news/china-slowdown-may-lead-to-75-dip-in-commodities/437850/. As OTM Call writer, I would watch the situation in China very carefully since, rising commodity prices especially crude oil prices has been a major overhang on Indian markets this year. This quarter results confirm pressure on operating margins, rising input costs, rising interest rates and with slowing Indian economy, situation doesn’t look very good. But lot of this could change if there is some kind of slowdown in world’s biggest consumer of commodities leading to sharp pullback in commodities.

For June series I sold M&M 740 call, Tata Motors 1200, 1250 & 1300 Call. M&M quarter result clearly reflect pressure on margins, which were lowest in last eight quarters and might fall further. M&M Stock saw sharp reaction on result day. Tata Motors is struggling in domestic Commercial Vehicles (CV) segment, although Jaguar Land Rover (JLR) contributes close to 50% of overall sales. Given poor economic data coming from US and Euro zone,  if there is slight slowdown in JLR sales coupled with slowing growth of Indian CV market then Tata motors is struggling big time. But lot of things might change for companies like M&M which have strong domestic business (tractor segment), if there is sharp pullback in commodities. Inflation may also come down quite sharply and ease pressure on RBI to raise interest rates, hence need to be careful while writing calls of companies like M&M.

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