India Investing
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Investing in the Indian Stock Market - Factors to watch
After a phenomenal 2007 during which new highs were tested on a regular basis, the current year has brought the Indian Stock Market crashing down to earth. Jittery investors have had one worry or another to make them exit the stock market in droves this year. The new year started with heightened worries over the credit crunch in the US and Europe. Foreign Institutional Investors (FII’s) started selling and exiting in droves after record inflows in the previous year. The effect has been to bring the Sensex down from the 21,000 to 15,189 as of the 13th Friday 2008 (the Nifty is now at 4,500 down from 6,350). The Rupee after strengthening strongly in 2007 has weakened in 2008 - due to the FII’s exiting Indian Markets and rocketing oil prices which has led to the USD being heavily bought.
So where to from here? My personal feeling is that there is not much good news which will help the markets in the near term. If anything there is more probability that there will be more bad news emanating as the credit crunch refuses to go away and there is little doubt any big news on this front will be felt all the way in India. So overall I think there does remain some probability that we will see the markets even lower by the end of August. I would not be entirely surprised to see the Sensex at between 12K and 13K and the Nifty at around 4K. However this all in the balance of probabilities.
The reasons for my bearishness are as follows:
1). Inflation - There seems to be a real problem with inflation rising globally and more so in emerging markets like India. As the prices of everything from Oil to food continues to hit new records there will clearly be a negative impact on RPI figures. Consumption is bound to drop off as people tighten their belts and the growth story starts to look not as rosy as it did in 2007. There seems to be very little room to use monetary policy to boost consumer confidence as well. The property sector is already starting to feel the pain and I see the large property companies getting hammered every day in the stock market. The question now is how long before this translates onto the real economy and house prices start falling? Consequently this also makes mortgage banks like HDFC probably less attractive at the moment.
2). Oil at $200 - well there has been a lot of talk about this and judging by the last couple of weeks this could be a real possibility towards the end of the current year. My own feeling still is that this will start to tail off by the end of the summer and we will see Oil nearer the $100 level. My feeling is that there will a lot of pressure on OPEC to increase production and there is also considrable amount of inventory lying around in tankers as refineries are cutting back on buying at the moment. Of course any unanticipated supply shocks owing to political events or natural disasters in the Oil producing areas of the world will send prices skyrocketing.
3).Weak Government - The BJP victory in Karnataka was clearly far more sweeping than anyone had expected or predicted. The current government faces a national election at the latest by May 2009 and as such is not likely to make any bold moves to tackle inflation with the BJP breathing down its neck nationally. I think we will see more inaction and prevarication as witnessed over the oil price rise. The markets will not like this sort of uncertainty and to be honest the econonomy will not benefit from this sort of weak leadership. Chidambaram clearly has a tough few months ahead of him and I think his credibility and credentials will be severely tested.
So overall there are a lot of factors which would clearly indicate than any investors should proceed with caution. Things will be clearer by the end of the summer I feel and there will be some great bargains to be had once the dust settles and the lie of the land is clearer. I will be doing a seperate post on my picks in the Indian stock market and my reasons for it in the near future.
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