Monday, March 7, 2011

Where is Indian Stock Market Headed?

Budgets are hard to decipher. Markets even harder. If anyone planned to make some money on budget day, they were in for a rude shock. Millions waited anxiously for each sentence to drop from Pranab’s mouth in TV, and the more discerning were scouring message boards to know what was the analysts’ take about that just dropped line.

Midway into the budget came the unanimous verdict - budget is not very populist, but good for economic growth. Within minutes, Sensex was zooming. By the time Pranab Mukherjee ended his talk, Sensex had lost all senses - a good 500 to 600 points up.

Then the reality slowly started sinking in. What was there so easily decipherable? That auto has been spared an excise hike? That smaller IT firms will take a larger beating? Nothing much else was easily decipherable.

Within minutes of the budget speech ending, the Sensex started tumbling, accelerated by IT and only somewhat sparing the autos. Within the next 30 minutes, 250 points were wiped off, and it didn’t stop there. By the time trade closed, another 125 points were lost.

If you are not into F&O, you would miss the gravity of the situation. For many investors who took positions on that day, and was caught on the wrong foot, the losses would have been roughly Rs. 10,000 for every one lakh of trading.

But that was not all. Many investors, smarting from huge losses, took up reverse positions, vowing to avenge the next day - they were sure of one thing - market is set to collapse.

But overnight, heavyweight brokerages prepared their budget analyses. The general consensus was this - the government has curbed its own borrowing, interest rate looks capped, and if crude can correct a bit, there is no reason why markets can’t rally again!

And crude eased a bit the next day, FIIs rushed to cover their massive shorts, and the markets rallied over 600 points, further damaging retail traders.

This must be the reason why ace investor Rakesh Jhunjhunwala advises retail investors to steer clear of any kind of intra-day or short-term trading. According to him, theoretically many can master stock trading, but it would be necessary to lose many battles, to die many times, before a retail trader can be successful.

Never think the circus is over. Now, quite a few days after the budget also, investors are scouring again for determining the sustained upside or damage for each sector from the budget.

And a new consensus verdict is coming, and it is again a reverse position - what the Government is intending is good, but it is not likely to be achieved! Interest rates may again inch up, and rate sensitives - from financial stocks to real estate to autos - are all set for another round of thrashing…

And in the confusion, many core elements other than the budget is being overlooked. If you delve deep into the recent stock-market correction, it was driven by only one thing - FIIs and DIIs withdrawing. And why did they withdraw?

All stock-market corrections are fundamentally corrections in earnings-valuations. This time also the same has happened, starting from the October-November-December quarter. Across-the-board inflation in industrial inputs, commodities, and crude has (and is) continuing to squeeze margins for most industries, pushing down their earnings-valuations.

And the consensus on earnings-valuations is that the worst is yet to come - in the Q4 results. Markets might go up a bit if Libyan crisis eases the pressure on crude, but looking up until April, the outlook remains grim.

And don’t expect much support for the markets from this Government. At least in their intentions, they are more concerned about economic growth which doesn’t work against inflation, and as such will always be at loggerheads with the markets. And lately, they have started to admit some truth too, that some things - read crude, coal, & metals - are not under their control.

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