The year’s ended, but there is not any respite from troubles in equity market and the world economy. Though inflation has shown some signs of slowing down but simultaneously, the industrial growth is also moving towards negative.
In last few days, stock market of world’s major economies were trading with a cautious note. The recent Euro Zone meeting, concluded to rescue it from a drastic economic collapse, had resulted in a Luke warm response from the financial world. The action taken during Euro Zone meeting was not decisive enough to overcome the debt crisis.
The Indian market has also taken several blows in its attempts to fight the economic crisis. Recently GDP growth has been revised down from 9% to 7.25-7.75%, the IIP data has drastically come down to -5% in second week of December and the rupee has crashed down against dollar to around Rs 52. The tax collection in India is expected to slow down due to weak industrial activity.
Since most of the troubled economies are China’s main business market, China’s growth is also under deep pressure to cope with the low demand. The property market in China has shown some slowing down signal, and it could further escalate the problem.
Expected Scenario and Important Events
Inflation to cool down
The Inflation in India and other emerging economy is expected to cool down consistently. The weak IIP data suggests low industrial demand, and the prices of agri based commodities are also expected to ease in coming days. Already, the food inflation in the 2nd week of December has come down to 4.5%. With the drop in crude price and industrial slowdown, it is expected that inflation will fall further in the coming months.
(IMPACT OF INDIAN STOCK MARKET: POSITIVE)
Crude and Energy Price Expectation
Energy has a major role in influencing the economic conditions. So far the world has seen crude prices jumping towards a new high despite European slow-down along with a great global economic concern; the crude price is not expected to cool down in coming months. The recent escalation in tension between Iran and US is expected to further push prices in upward direction. In a situation of any restriction/ban on Iran's oil export, the price of energy product is expected to show a sharp increase in coming months. This would have an adverse effect on the equity market. The impact of energy price escalation would have a severe effect on the inflation and Indian government’s intention to control current account deficit in short term.
(IMPACT OF INDIAN STOCK MARKET: Negative)
The Value of Indian Rupee
For last two months, the depreciation of Indian rupee against dollar had been the biggest concern for the government and the RBI. Though in credit policy review of December 2011, the RBI has decided to keep the key rates unchanged but still the depreciation of Rupee is expected to continue until Rs 56-57/$. Amid lots of speculations about RBI decreasing the CRR rate, a curb on FOREX trading has been ordered by it to check manipulative speculation. Further, if the world economic condition worsens, then RBI is expected to sell some of the Gold that is holding. The FII inflow/Outflow is also important to watch, as any negative rumor can make them pull out money in coming days causing Rupee to decline against the dollar.
(IMPACT OF INDIAN STOCK MARKET: NEGATIVE)
Elections in Five State
The elections for five states assembly have been announced by the election commission during Feb 2012. Its result would have a great impact on the central government’s stability as well as the stock market. Due to elections, the budget session is also expected to be postponed to second week of March 2012 i.e. after the result of assembly election. The market seems to be very volatile due to increased frequency of rumor based information flow in coming months.
(IMPACT OF INDIAN STOCK MARKET: NEGATIVE)
What should an investor do?
When the market is standing on the edges, it's better to take advantage of every opportunity because in such a situation the stock's moment decouples itself from the valuation and fundamentals; the only thing that drives the market in such a situation is “Rumors ". Any negative news in this situation would push the market downwards more then expectation.
The investor should just focus on shares with good fundamentals and invest while the prices are at a rock bottom level compared to the actual valuation. For example, the capital good sector seems unattractive at present due to fall of Rupee value against dollar, but I would suggest taking a contrary view.
The inflation is slowing down, and Rupee too is expected to stop depreciating after some time. As soon as the RBI decides on rate cut, the investment in the infrastructure sector would take a pace, and capital good's sector would be on the front to take the advantage. Similarly, there are other selective sectors from which investors can reap precious advantage for investment in coming days.
(Investment suggestion: Diversified value picking on sharp corrections with a long-term view. Daily Traders please keep away)