Uncertainty Rules

The week gone by has been very dramatic for the Indian stock market. Although the market ended almost flat as compared to the preceding week, the market witnessed a great deal of volatility in the last four trading sessions. What happened last week in Indian stock market is an indication of the shallow impact of the "Decoupling Theory" that India is well insulated from the global markets. The Indian market movement only demonstrated how strongly we are linked to global markets and how our indices follow global trends so religiously.

The government may be in the denial mode and may hold the view that everything is fine with the Indian economy. The slowdown in the global economy has left some impact on the Indian economy and this is reflected at least in the IIP figures for January 2008. As part of dealing with the slowdown the US Federal Reserve announced on Tuesday (March 11 2008) its move to pump more liquidity into the global financial system by easing the terms for direct loans to banks and increasing swap arrangements with other central banks. Many of the Asian markets, including India, opened higher buoyed by the Fed announcement, but no runaway rally was seen.

Many analysts believe that although it is a positive move which is likely to alleviate some of the liquidity concerns on the short-term, it does not fundamentally solve the problem. The Sensex carried its momentum on the very next day by opening on a positive note, but lost its sheen when other global markets moved downward on account of rising crude prices leading to inflation risks. Crude surged to its highest level of $109.7 per barrel in intra-day trade since 1983. Therefore, there is no point in vociferously arguing for the "Decoupling Theory". It is important for Indian markets to keenly watch global cues. What we notice today is a sense of uncertainty in markets around the globe. For example, US markets witnessed a good amount of rally after the Fed announcement of infusion of liquidity but witnessed a decline the very next day on the concern that the Federal Reserve will fail to prevent a recession Even domestic factors have been disappointing.

The IIP figures for January 2008 announced on March 12 do not project a good picture of the Indian economy. Growth in industrial production fell sharply in January 2008 to 5.3 per cent as compared to 11.6 per cent growth in January 2007. The sharp fall in the month of January resulted in just 8.7 per cent growth for the period of April 2007-January 2008 as compared to 11.20 per cent for the similar period last year. The most impacted segment is the consumer durables which witnessed a drop of 3.1 per cent as compared to the growth of 5.3 per cent in January 2007. Growth in capital goods also declined to 2.1 per cent as compared to 16.30 per cent growth in the last year. The slowdown in the capital goods segment is more alarming as it is an indication of the lower capex being carried out by companies. While we are already reeling under inflationary pressures a slowdown in the capacity addition will only worsen the situation. The only sector that has shown growth is mining and recorded 7.7 per cent growth as against that of 1.8 per cent last year.

What investors should be mindful about is that the decline in domestic demand will surely impact the stock market and creates doubts about the growing domestic demand and decoupling story. Although the finance minister announced some benefits on the personal tax front in the recent budget to improve liquidity, the shrinking domestic demand along with a slowing global economy will certainly take its toll. The adverse impact can also be seen on the corporate results which are seen as immediate triggers for markets. While lower demand will reduce top line, the rising commodity prices are expected to eat up the margins.

Coming back to markets, I expect the downward trend to continue in the week ahead. There are no immediate triggers in the domestic market. The US Fed is expected to meet on March 18 and it is likely to cut 75 basis point but has already been discounted in the market. In addition, in such an uncertain market with two off days in the week ahead no one would like to increase his or her exposure. For the last week the number of declines has been higher than the advances. There is some increase in volumes but mostly in the front line counters. A sincere advice to investors: avoid taking any exposure at current levels. Uncertainty is very high in the market and hence staying away from the market seems to be the right strategy.