Whither Markets?

Whither Markets? To what place, end or purpose? Take me wherever, whatever….I have no purpose! Such has been the confusion over the last one and a half years or so that the markets have been….directionless, clueless and with no sense of where to go.
 The period has been plagued by debt worries in the euro-zone, US economy concerns and by numerous scandals on the domestic front. The corruption scandals along with the civil society movement have forced the government into a state of inertia, unable to undertake any major policy initiative on the reform front.

Despite the RBI increasing rates by 10-times over the last 15-months, there seem to be no respite on the inflationary front.

Inflationary concerns along with rising oil prices have only added to the global economic woes. Despite the RBI increasing rates by 10-times over the last 15-months, there seem to be no respite on the inflationary front.

  • Structural problems in the areas of storage, procurement & supply system, and a broken food distribution system continue to be a major constraint in fighting inflation. The government effort to control inflation (on the demand side, while supply side problems continue) seems to be self-defeating.
  • While food inflation continues to behave stubbornly, the GDP growth rate is slowing down. Amidst slowing industrial output, the government has scaled down the GDP growth projections for 2011-12 to 8.6% from the earlier estimate of 9% declared in the budget.

In the light of the above, it seems only natural for the markets to have been range-bound and with no purpose. Indian investors have been lapping up debt products to enhance returns on a portfolio where equity returns at best have been tepid. Given below is the summary of what has been happening with the Nifty over this period-

  • Nifty has traded between 5200 and 6200 levels for most part of the period between January 2010 and till date.
  • Briefly trading between 4800 – 4900 plus levels in Feb’ 2010.
  • Peaked at 6301.55 on 9 Nov 2010. Sustaining 6000 + levels till 2 Jan 2011 and then correcting to 5225.80 on 9 Feb 2011.
  • Recovery to 5911.50 by 12 April 2011 and the strong resistance sees the Nifty correct to 5257.90 by 20 June 2011.

With Nifty being range bound between 5200 and 5900 levels, market participants see these levels as a strong support and resistance levels to watch out for before the market is able to establish a clear direction.

We can look at the Indian markets from two primary driving forces…It’s

  • fundamentals i.e. GDP growth rates & other macro-economic indicators and
  • sentiments i.e. demand / supply factor. Fund flows from FIIs are far greater than domestic flows and can influence market direction purely on global sentiments.

Though growth projections may be scaled down,Indiawould still be amongst the few economies across the globe to have growth rates of 7% plus over a prolonged period of time. Looked at from a long term perspective, equity would still be the story to bet on.

Ground reality is that

  • Global capital flows outnumber domestic flows into the capital market by a huge margin. FII flows in India will therefore continue to play an important role in the near future.
  • Looked at purely from a demand-supply perspective, FII numbers will define the trend in the short-term. Their views on global trends and on India will define the fund flows and the sentiments thus prevailing will dominate the markets in the months to come.

Markets thus need to break out of the range bound movement to establish a clear trend. From a valuation perspective the markets are neither cheap nor expensive; Sensex trades at around 15.2 times it estimated earnings and is close to its historical average.

Inflation and the rising rates remain a cause of concern for the domestic market. Global macro-economic headwinds still remain and are a cause of worry for the short-term.

The refreshing breather has been the Eurozone Summit held on July 21st. The European leaders agreed to a new rescue package forGreece that seeks to balance the interest of all parties concerned. The leaders agreed to swap privately held bonds into 15- and 30- year debt where the principal is “almost completely collateralized” thus averting a collapse of the euro region.

These are positive developments for the market. The markets however, need to break out above their resistance levels on a sustainable basis to bring back investor confidence.

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