Making sense of the markets – my perspective

I have been asked by several people over the last few days as to what are my impressions of the market and whether one can make some sense out of the mayhem that seems to engulf all markets globally. In the present circumstances it is not an easy thing to do but I will take a crack at it as I believe that just saying, “anything can happen in the market”, is really said by all fence sitters who are unable to understand what is going on. I will try to explain things in as simple a manner as possible, for more complex arguments and data, you have access to multiple sources.

In terms of the global scenario it is not too difficult to see what is going on. The following are of note:-

• The world growth was critically dependent on the Chinese economy and that has been compromised greatly.
• US and Japan are actually doing better, compared to the last few years, but their impact is not yet significant.
• Europe has had problems, specifically with Greece defaults and subdued demand.
• Among the BRIC nations only India was showing promise but they had their own set of unique issues.
• Devaluation of the Chinese currency is an indicator of the pressure their economy is under currently. This has affected commodity prices adversely and may well result in large scale flight of capital from China.
• There is an expectation that US Fed may hike interest rates on September 17th. This will signal an end to easy money availability from an official angle.
• Stock markets are largely determined by FII investments and they will continue to shift money from one market to another in these uncertain situation. One can expect volatility in all markets due to this context.
• A look at all markets will show that India is in a relatively better state as compared to other major players.

Specific to India, the following aspects need to be understood in order to make sense of the market movements:-

• The markets had run up in 2014 and early 2015 with an expectation of major government policy announcements as well as better earning expectation from companies.
• The legislative imbroglio in parliament has put serious questions on how fast things can change on the ground, even though a lot of positive executive actions have been completed by the government.
• Earning of companies have shown some first indications of improvement in the last quarter, but it will probably take the rest of this Financial year to become definitive.
• Availability of capital is still an issue with the rate cuts not having happened as expected.
• Valuations of some companies have become expensive and many investors are deterred by these today.
• The Rupee situation is a problem and it is possible that Rupee will stabilize around 65 levels rather than 60 now. This will be a challenge for imports, especially for manufacturing related industries.
• Positive things in the economy today are as follows: A government with positive intent, transparent operation of auctioning national resources, good management of economy on CAD and Fiscal deficit front, possibility of things happening on black money area, lowering of inflation to realistic levels etc.

With all of the above being understood, where can we say our markets are going in the near and medium term future? While it is always hazardous to predict market levels, I think the following situation will play out largely.

• Indian markets are still in the middle of a structural bull run. It will be important to remember that bull runs have several sharp corrections on their part. In the near term it is possible that we are going to see near 7000 levels of the Nifty. I do not think it will go below that, in fact my bet will be towards a support level of 7500.
• Over this FY my expectation is that the Nifty will strengthen to a level beyond 8500 and will possibly be at 9000 levels by March 2016. The bias on the Nifty is thus quite positive still.
• Improved earning over the next 2 quarters will open the floodgates for FII investments and can accelerate the process of recovery in our markets.
• If the 9000 levels are achieved in March 2016 or before, the bull run would have resumed in a definite manner.
• Over the next 2-3 years it will be possible for the Nifty to reach levels of 12000 or so. However, this will be interspersed with sharp drops and 7000 – 8000 levels will also be there a few times.

What should one do as an investor in these times and in the future? Well, for the main it must be “business as usual” strategy. Continue your investments and if you are investing for the long term look at possible increases. Do not focus on the day to day roller coaster ride of your portfolio values, they are important only when you want to sell. At the same time, avoid all temptation to over leverage yourself to invest in equity.

In the next post, I will write about how I am going to handle my investments from the next quarter onward.

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