A five percent flare up on both, the Nifty and the Sensex last week, brought back smiles on the faces of most investors. And as optimism returned on the street, so came with it bullish forecasts and some analysts even went on to predict a return to the earlier tops of last year. While the up move last week was really good, and technically reflects a strong undertone and an upward bias, it perhaps is too early to jump into the buying frenzy.
An investor must remember that bear market rally’s are treacherous and always display symptoms of a bull market move, then most often end abruptly. So if we take the view that we are in a bearish trend, then the rally should be viewed with caution. If the other view, that the market continues to be in a long term bull market is considered and the view that this entire decline since November 2010 was a bull market correction and if we are to conclude that the correction has ended, then we still need to wait. For a complete reversal, the market may need to test both the recent lows as also have to undergo some time/price consolidation.
The intention here is not to be pessimistic. But cautious optimism will always hold an investor in good stead. One should not forget that the global economy continues to experience turmoil and too many uncertainties plague its path. Back home, while we are partially insulated from global mishaps, we are not totally decoupled and can be affected, although to a lesser extent. But affected we will be…so that eventuality must not be overlooked. Moreover, India continues to grapple with inflation and an economic slowdown. Inflation shows no signs of moderation. For the fiscal year starting April to September 2011, it stands at 9.6% compared to 9.9% during the same period of 2010. I personally believe that inflation could continue to remain above the 9% mark throughout this year.
Then there is another bother. Industrial growth has slowed to 4.1% in August on account of the poor performance of the manufacturing sector and a decline in mining output. Here too, I would estimate that India's economic growth in the 2011-12 financial year would be in the 7.4 to 7.6% range, much lower than the government’s projections.
In addition, the rupee remains weak. It has already fallen 16% against the dollar in the last one year. So any gains from a softening in international commodity prices including oil would stand neutralized. As CRISIL Research says “For any gains from the recent decline in international crude oil prices to reflect in lower inflation, the rupee will have to appreciate to 47.00 per US$ by December 2011.” That seems unlikely.
Then there is one more worry at hand. The RBI’s mid-year monetary policy review is scheduled on October 25th. It is most likely that it would continue with its hawkish stance and announce another 25 basis points rate hike. If that happens, it would further stifle growth and ultimately reflect on corporate profitability.
As such the best advice for investors is: Stay Cautious… We may be seeing a ‘disconnect’ between the stock market and the economy.