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Monday, July 12, 2010

Global Fears - How Indian Stock Market Performs?

We know this for a fact that Indian markets have always been impacted by global factors. So whether it is weak unemployment numbers in the US, or liquidity concerns in China, stocks in India have taken the hit. And as we see now, the economic situation globally isn't cheery at all! The three bugbears that are impacting sentiment are - Europe, US, and China.

Let's look at each one of them.

Europe: It's cloudy in Europe as of now. And not just the weather, we are also talking about the economic situation in several Euro nations. Right from Greece in the south to Spain and Portugal in the west, these countries are facing a severe debt crisis. In fact, the crisis facing the region's single currency (Euro) is by far the deepest in its short history. Governments there have created an emergency fund to deal with the crisis, but measures still seem short given the magnitude of destruction it can cause. Rising unemployment, political turmoil, cuts in government spending and falling consumption are the biggest risks this region faces over the next few years.

US: It's an age-old story in the world's richest and most arrogant financial economy. The worst part is that those who caused this crisis in the first place are not ready to apologise and take lessons from their misdoings! Financial regulations are trickling in but these mostly seem like half measures. The US government is still willing to bail out big companies. And the central bank is ready with its presses printing loads of dollars to tide over any cash crunch. In short, the Americans are trying to get over the crisis fast using measures that caused the crisis in the first place! So, the situation remains hopeless in the US.

China: This elephant seems to be dancing wild. Many now fear that the Chinese economy is going to come to a screeching halt. And China seems to have emerged as the biggest worry for the global economy and markets. The country is trying to cool down the bubbles that seem to be forming in its realty and stock markets. This cooling off is being seen by many as a sign of sharp slowdown in demand for commodities. Even the slowdown in Chinese consumer demand is being feared.

So, here were the concerns that are rocking global markets, including India.

Coming to our own issues, the key ones here are - rising inflation, huge government deficit, and fear of higher interest rates. On the brighter side however, there are factors like oil price deregulation (even if it seems like a token measure) and good monsoons.

As far as corporate performance is concerned, there is no doubt that good sales and profit growth are back in vogue. Companies are also looking at paring down their debt and thus lower pressure on their balance sheets. Weak commodity prices are also seen as leading to margin expansion for manufacturing companies. Consumer demand is picking up for companies in the auto and FMCG space. Though property demand is yet to pick up pace, we have almost lost hope there, given builders' greed that is keeping real estate prices artificially high.

So overall, the internal situation in India is somewhat mixed.

How will the stock markets perform given all these factors?

We believe Indian markets may also feel the heat of the global crisis sooner than later. But isn't a correction in stock prices expected (and not feared) in this year?

See, we all fear corrections. And we all feel the ardent need to do something when a correction like event strikes, even if we expect it to be just a minor one. Like selling some stocks, fearing the markets might go down even further.

But then, we believe that after the sharp rise in stock prices we saw in 2009, a correction this year should be expected and not feared. Corrections are just a normal part of stock markets and do not alter the overall bull market trend. And given the way India's economy and companies are evolving, the markets will definitely be in for a good time (notwithstanding the normal hiccups) over the next 5 to 10 years.

One must also never try to time a correction. It is nearly impossible. Anyone can give into fears, pessimism, and crowd mentality. But what distinguishes a successful investor is discipline and patience.