Global & Domestic cues continue to haunt

Markets still in Red Zone

For those who are getting a comfort factor with this week’s dramatic rise of sensex, I do not have a good news to share. The sentiments still remain shaky for the markets and the macro environment is still having a negative bias.

Yesterday, I was thinking about the way Indian markets are behaving and a question that came to my mind was “Are Indian markets too emotional”? or in other words “Are Indian markets too irrational “? Irrational markets typically display bouts of extreme volatility both on positive and negative side and we have witnessed similar pattern in last one year or so. Initially the market was swamped with positive “bias” and went on rocketing to 21K levels as if there was no tomorrow and this year what we have witnessed is the other face of it i.e., Negative “bias” followed by global concerns, Inflation and political instability.

What went wrong ?
What are markets? We say markets have negative /positive bias. But what is market made up of? Aren’t they made up of Investors who put in their money for a better return? So If I say markets are displaying irrationality, doesn’t it mean that the Investors in Indian markets are showing immaturity or lack of understanding about the macro environment. The market statistics are nothing but sum total of Investor behavior as depicted in their buying and selling patterns. A major factor that drives Indian and other emerging markets is that FII’s are a major force in driven the market behavior. So do we say that FII’s have realized that these emerging economies may not satisfy their hunger for quick bucks and are fleeing the scene? Were they caught on wrong footing? Did they overestimated the potential of these economies?

If one see the pattern of Indian markets vs. US markets (In the above chart Nasdaq trend is depicted in Blue, Sensex in Red and Dow in Green), it is visible that even though the global factors are weighing heavily on the markets, most of the bad news is emerging out of the US, the US markets have shown more maturity in terms of movement of their indices. While US markets are down only 14%, Indian markets have tanked by more than 30% during the same period.

FII’s are still selling, MF’s do some shopping

If we looks ate the current pattern of Investments of FII’s and mutual funds, FII’s are still selling heavily. They have already sold 6 Billion worth of stocks on a net basis in this year. The month of June saw second highest selling after January’08. Mutual funds came out to do some shopping in June and are net buyers even in July so far, but the volumes is much low as compared to FII’s. Moreover, Mutual funds has also not being major buyers in the stocks and hence are not able to provide major support to the indices. HNI' had been reported to already cut down their exposue in equity markets significantly. One thing is very clear, If markets have to go up strongly Institutional interest is a must. In the current circumstances this doesn’t seem to be the case and hence any short covering (or say technical correction) should not be read as resumption of buying interest in the markets.

Crude is down but not out

The crude oil surge showed some signs of cooling (currently trading at $128.5) after hitting highs of $145 in July. Experts are of the view that this might be a temporary correction. I have been reading various articles on crude oil and the common consensus is that the crude at settle at $100 levels by the end of this year. Any increase in crude prices from here would act as negative news for the markets. I have explained in one of my earlier post as how rise in crude oil aids in increasing the inflation and hence Inflation which is another big dragger of the markets would also get help if crude cools off faster.

Domestic cues are Negative
Morgan Stanley has revised its GDP growth estimates for India down from 7.4% to 7.1% for FY09 and from 7.8% to 7.6% for F2010. Rating Agency Fitch has revised its local currency grade outlook for India to negative citing deteriorating public finances, mainly due to subsidies (Read the article in Reuters )

As expected, Inflation rose marginally to 11.91 as compared to 11.89% last week. Analyst are of view that Inflation might touch 12% before settling down at the end of the year or early next year.

However, there is good news on the Corporate tax and direct tax fronts. Belying fears of slowdown in economic growth affecting government revenue, direct tax collections have grown 38.6% to Rs57,373 crore in the first quarter this fiscal. Corporate tax collections rose 32.65% to Rs34,566 crore for April-June period this fiscal, against Rs26,058 crore during the corresponding period last fiscal.

Political drama continues and the coming week is very crucial in deciding the fate of the UPA government. The confidence motion on Tuesday would decide the short term trend in the market. The fall of UPA government may add to the woes of market as it may lead to further pull out by FII’s. However, the general opinion is that the UPA would manage to save its face.

Investment Guru’s Outlook
My opinion remains same as I gave in my previous post on market outlook. The sentiments are still negative and one should not expect markets to zoom. However, at the same time, long term investor should cherry pick fundamentally strong companies for investing with at least 1 year horizon.