The coming year would be challenging for the Indian markets. Allow the markets to bottom out before investing
The year 2011 has been bad for the stock markets. Bad may actually be an understatement, as not only are we one of the worst performing markets globally, the Indian rupee has tumbled as well.
Going forward one would like to do some crystal gazing and see what the New Year would have in store for the investor. Very clearly, the New Year would be challenging and there would be a lot of pain and hardship to start the year. One should expect tough times at least in the first quarter of the calendar year and last quarter of the financial year. December quarter results, which would be announced in the beginning of the next year, are likely to see pressure on corporate India performance and the growth slowdown is likely to get extended and last for at least one more quarter. There would be a telling effect on sales, margins and the depreciating rupee would cause more hardship and there would be gains for a few companies. The gains would be for far fewer companies than losses. The leveraged companies are the ones, which have taken a big hit, and interest costs have taken their toll.
Gain and loss
The Union Budget is likely to get delayed to the first fortnight of March as elections have been announced for five states, which would go to polls beginning from January 28 and ending March 3. The timing of the polls are an indication that looking at the current fiscal situation and the huge deficit, the government had nothing to offer in the budget for the poll bound states and chose to schedule the same prior to the budget which could be a challenging one this time around.
With a challenging quarter, rising fiscal deficit and a slowing down economy one should expect some downfall from current levels. More than the downfall there will be a stage of consolidation, which would be there. Things are likely to improve post the budget or post March results, as the worst would be discounted or stock prices would reflect the current state.
Reality, infrastructure, banking, capital goods are all sectors, which have been big losers in the year just getting over. These sectors leaving aside Reality are likely to improve in the coming year. The banking sector has fallen sharply and if industry has to do well, there is no way that the banking sector will not do well. This is a good sector to look at and invest on dips. The IT sector should do well in the coming year and the depreciating rupee would help the sector. It would be unfair to assume that the sector would benefit to the extent of the depreciation as these companies have dollar denominated expenses, which would have to be paid at higher rates.
Word of caution
The markets are likely to bottom out some time in the first quarter of the calendar year. Markets have been on a downturn for more than 12 months now and had peaked out in November 2010. Any recovery after such a long period will always be slow, gradual and need a lot of conviction before it gathers steam. Trying to predict a closing level for the BSESENSEX would be difficult as global conditions are challenging as well. It would however be fair to assume that the benchmark indices would gain between 12 to 15 per cent from current levels in a year's time. The important thing to remember is that markets have not yet reached their bottom and the recovery from the bottom or gain from the bottom would be much more. A level of 17,500 to 18,000 on the SENSEX at year end levels or the high of the year is a decent level to expect in the coming year.
A note of caution however is that allow the markets to bottom out as that is some time away. Investment may be made in small lots at every fall and play for small moves. The market will be volatile and will allow plenty of trading opportunities as well.
Lessons from 2011
While, 2011 was a tough year for Indian markets, it is important to note that, a number of things had gone wrong for the economy last year. It all began with double-digit inflation, which just refused to come down, and RBI had to raise interest rates through Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo and Reverse Repo rates on 11 consecutive occasions. The result was that corporate India felt the tremors of these incessant rate hikes and by the time results for the quarter ending September were announced, one could see the visible signs of a slowdown. IIP numbers for the month of October confirmed the worst fears and one saw the numbers turn negative with capital goods sector bearing the brunt of the slowdown. GDP growth, which was being talked of as 9 per cent and then 8 per cent and then 7 per cent is certainly going to be below 7 per cent.
The result was a substantial drop in tax collections whether it was the direct taxes or indirect taxes. Coupled with this slowdown and drop in tax collections was the fact that the depreciating rupee and rising crude oil prices have put pressure on the import bill and subsidies on the petro account. Food, fertiliser and petro subsidy has affected the fiscal deficit and the sorry state of affairs in the stock market has not helped the government in raising the estimated amount of Rs 40,000 crore from divestment. A paltry sum of Rs 1,145 crore was raised and the issue of ONGC was cancelled/deferred one day prior to the road show of the company. The primary markets have not done well and the quality of issues coming to the market has deteriorated considerably in the last 12 months. The problem has been further accentuated with many of these issues being pre-sold and tanking more than 2/3rd or more on either the listing day or within a short time causing huge loss to the investors and long term damage to the stock market by eroding the confidence of investors.
Such has been the extent of fall in the markets that stocks like L&T have lost just about 50 per cent, while Reliance has lost 30 per cent and even Infosys is down 22 per cent on a year on year basis. The performance of the entire market has been bad and barring a few exceptions particularly the FMCG sector, which has done very well, almost everything leaves a lot to be desired.
Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website http://ak57.in
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