Bundestag saves EU, but St still wary

It was deja vu for markets around the world on Thursday as Europe averted disaster yet again, right on the edge.

In a huge sigh of relief, the Bundestag, or the lower house in German legislature, equivalent to the Lok Sabha in India, agreed to support an expansion in the powers of a fund set up for bailing out European nations and banks laden with debt in a move that will more than double its contribution to the fund to help more indebted nations.

The house passed the measure with 523 votes in favour and 85 against, granting the European Financial Stability Fund powers to buy bonds in secondary markets, enable bank recapitalisations and offer precautionary credit lines.

The bailout fund has a size of €440 billion (or Rs29.4 lakh crore). Thursday’s move raises Germany’s guarantees to €211 billion from €123 billion earlier.

European markets were up on Thursday with major indices in Germany and France up close to 1% at the time of writing.

Indian markets too closed with gains. The Bombay Stock Exchange’s Sensex gained 252.05 points, or 1.53%, to close at 16698.07. The Nifty, its counterpart on the National Stock Exchange, closed at 5015.45.

Still, lest the news cause exhilaration, market mavens are quick to point out that further declines in the days ahead cannot be ruled out just yet, depending on news flow from the region.

“It is a temporary respite. The market is fairly valued from a long term perspective but that doesn’t mean we won’t see any pain over the next three to six months. Foreign investments in equity is more likely to flow outward than come in the near term,” said Abhijit Gulanikar, chief investment officer, SBI Life Insurance.

Foreign institutional investors (FIIs) were net sellers by Rs230.3 crore on Thursday, according to provisional exchange data.

The FIIs have been net sellers by Rs908.30 crore so far in 2011, after being net buyers by Rs85,754 crore in the same period last year, according to data from the Securities and Exchange Board of India.

Anand Tandon, chief executive officer at JRG Securities believes that the current news flow only focuses on the tip of the iceberg. “They have just postponed the crisis because Greece bailout is a small part of the bigger euro zone sovereign crisis with Italy and Spain likely to be in debt problem next... I don’t expect a runaway rally for markets in the near term.”

The nod from Germany, Europe’s biggest economy, allows euro-zone officials to weigh further measures to bolster Greece and stem investor concern. Options include seeking further write-downs on Greek sovereign bonds, adding yet more firepower to the rescue fund and a plan to protect banks.

Greece will now await the next tranche of funds it needs to avoid a default on its debts, to be given on condition of fulfilling severe austerity measures.

A longer term solution is still awaited, feels Sandeep Nanda, chief investment officer at Bharti AXA Life Insurance. “One needs to get clarity on what would be the mechanism adopted by Europe to leverage the EFSF fund so that they can take care of bond redemption over longer term,” he said.

Domestic triggers are few and far between, said Ambareesh Baliga, chief operating officer at Way2Wealth Brokers. “There are no immediate triggers with not much expectations from quarterly results. However, the falling commodity prices on account of global issues would be positive for India as the effect of these would help to reduce inflation with a gap of 1-2 quarters,” he said.

Indian investors could wait for more favourable levels, feels Tandon. “Investors should wait at the moment as any negative global events may lead to markets falling once again. The safe entry point may be closer to 4400 levels where the risk reward ratio becomes quite attractive.”