Over the last few days the stock markets in India and Globally have corrected sharply driven by various concerns on inflation, growth, roll back of stimulus measures, Chinese tightening and finally expectations from today’s RBI policy. There were also concerns on market valuations going on but these are not so relevant in my view as I have mentioned earlier that in Bull markets valuations will always look expensive.
On an overall basis markets have corrected nearly 10% from the top. From the current levels downside looks extremely limited as markets are heavily oversold and earnings and economic growth outlook is also improving. Wild swings in the short run have also taken place as a large part of the inflows into countries like India the recent past was through ETF’s which have seen redemption’s post the markets starting to correct. In the short run the volatility is expected to remain high with there not being much of data flow in the near term and markets looking forward to the Union Budget.
The RBI’s credit policy has addressed inflation concerns by increasing CRR; however their comments on them being concerned on the growth outlook and the up gradation of growth forecast is a positive. It is unlikely that interest rates will now be tampered with before April as the inflationary expectation have been taken higher by giving a figure of 8.5% for March. With commodity prices softening globally and food inflation unlikely to move up from where it is inflation is likely to be on a downward trajectory from April onwards. Inflation in India is likely to be a cyclical phenomenon and not a structural one. The reason why I was happy on China taking up tightening was that, in my view it is Chinese demand that has created the huge upswing in industrial commodities and as China makes noises on tightening and becomes concerned by inflation it is likely to have a positive impact on India.
The results season on an overall basis has been quite reasonable with strong results from most quarters. Very few segments of the markets disappointed and then also it was not an industry specific event. In most industries there has been a wide divergence in performance and the prices of stocks have accordingly adjusted post results. Being invested during results season is always a difficult thing as results reactions tend to be pretty drastic and in most cases do not take into account the long term growth prospects. On the other hand it is also an opportunity. One key feature of the results on the capital goods and infrastructure side has been slow execution despite large orderbooks and this has resulted in this segment of the market underperforming. Technology, Autos, Banking and Steel companies on an overall basis outperformed expectations.
After one event i.e Credit Policy is out most investors will start focusing on the Budget and the Fiscal Deficit. In my view Fiscal Deficit for next year might be below market expectations as growth picks up and the denominator goes up. Revenues are likely to pick up sharply due to the roll back on indirect taxes that were reduced as a part of fiscal stimulus, stronger economic growth and strong profitability growth of the corporate sector. This should have an impact on reducing the pressure on the yields of government securities. However, this is a topic in itself and I will write in more detail later.
I am neither a believer in the theory that developed markets might outperform as risk aversion grows nor do I believe that that is likely to be any sharp reversal of capital flows. The month of January has seen an outflow or around USD 2.5 billion and as markets stabilize we should see inflows pick up again.
On an overall basis the markets are likely to bounce back in the short run while remaining in a tight range till the end of March from where a stronger upward trend is likely to breakout. I am strongly of the view that with the kind of growth outlook that we have for the economy and corporate earnings growth, we are likely to see a new high of the markets before the year 2010 comes to an end and as such any significant correction is a good buying opportunity.