Thursday, November 11, 2010

Will the Indian Market Sustain this Momentum?

This is a million or rather a billion dollar question. Everyone including you and me is surprised over the fact that the Indian stock market is strongly growing and the BSE is currently trading at an all time high of around 21000 points. This is indeed excellent news for all investors across the globe; who have invested in the stock markets in India. But happiness isn’t the only thing that’s on everyone’s minds. Caution or skepticism is also abundant among knowledgeable investors. The purpose of this article is multifold and will cover the status of the global and Indian markets, the outlook for the next few months. Lets get started!!!

Status of the global markets over the past month

The global markets in the USA, UK, China etc have been growing slowly but steadily over the past month on the back of improved economic news. Recent news suggests that the slowdown phase is probably over and policymakers across the globe have started to ease up on the tightening measures to aid this growth. Europe has been encouraging on the economic front and their policy towards the same has only fuelled further growth. Good manufacturing data is coming in from the US, China etc which suggest that the double dip recession maybe receding. US Consumer spending has increased significantly in the last quarter and the weekly jobless claims have also fallen, which is evident in the stock markets numbers.

The US Markets posted a net growth of around 5% in the numbers at the end of the month when compared to where it was at the beginning of the same. Similarly the European markets posted a growth of around 3% and the asian markets around 5%.

Overall the market outlook as a whole looks positive as well as promising.

Status of the Indian Market over the past month

The Indian stock market began on a positive note and has shown solid progress over the past month. The stock market is currently trading at the 21000 levels which is where it was a couple of years back before the global meltdown happened. Strong global cues, good or rather great Q2 advance tax payments by corporates and companies and sustained buying by FII’s boosted the sentiments of the Indian investors. FII’s have made investments of more than $5 billion over the past one month. The repo rate has been hiked 0.25% and has gone up to 6% and the reverse repo rate has gone up by 50 basis points to 5%. New policy decisions from the government of india about the reduction of corporate taxes helped sustain the growth of the markets.

The local markets posted solid gains of around 10% over the past month which is much higher than the growths posted by the US or the Euro markets.

Will the Indian markets be able to sustain the momentum?

If we compare india with its other emerging market peers, the Indian markets’ valuations are fair and justified though they are at a slight premium. Though our economy is sensitive to global shocks, india is a highly domestic-driven economy unlike our peers China or Brazil who are more dependent on exports and rely on the commodity markets for their GDP growth/expansion. This distinguishing factor will be greatly reflected in the equity valuations in our stock markets. Therefore, our markets will continue to attract a large share of FII inflows when compared to its peers.

The high domestic demand is the reason why, india was the first to recover from the slowdown. Though we have a solid export contribution to our GDP, the local or domestic demand contributes an even higher number and hence the earlier recovery.

Your next question is going to be – How long will this Rally continue?

Predicting the market especially one like the Indian market where liquidity is one of the important trend determining factors is extremely difficult. Even experts have burnt their fingers with their suggestions/recommendations. Coming back to the topic, liquidity flows will strongly determine the direction of the market, especially the flows from the FIIs. Also, the doubts about the US getting into a second recession or avoiding the same will determine the global equity flows. As for now, the global economic situation looks stable and we can expect the markets to perform strongly for the next few months.

Financial Industry, Capital Goods, Infrastructure, Power, Media, Hotels and Pharma can be expected to outperform the market. Whereas Automobiles, Consumer durables and a few of the banking stocks might underperform the market.

What Strategy should a small investor follow now?

This is by far the most trickiest question given the current scenario. In my personal opinion, small investors should invest only in large or big midcap companies with a sound management and fundamentals. Stay away from small caps or penny stocks that you do not know much about. Buy on dips would be a good strategy.

Pick out a good company and start buying in small portions everytime you see that the price is correcting or coming down by a decent number.

Overall, the market sounds positive and investing in good companies for the long term would definitely prove beneficial to all investors.

Happy Investing!!!

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