Where is the Indian stock market heading?

June 15, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The BSE Sensex has left us guessing about where it is headed. It’s not an easy task considering it had touched 20,509 in Jan 2010 and peaked at 21,207 in Jan 2008.

I wonder what will eventually trigger the directional move everyone seems to be waiting for. Will it be fears of heightened inflation resulting from an expected hike in diesel and cooking gas prices, a global event in the euro zone or some change in the U.S. economic scenario?

I am not sure that lending more money to defaulting nations will resolve the euro debt challenge just as the quantitative easing has not yet addressed U.S. economic concerns.

Oil prices which depend on the balance of power between OPEC and the opposing Iran and Venezuela will continue to be volatile especially with the ‘Jasmine revolution’ showing no signs of abating.

The Chinese economy with its investment-oriented growth agenda will continue to consume even as its economy cools down and according to the Food & Agricultural Organization, food commodities may continue to hold firm due to supply shortages mainly as a result of natural calamities.

All this combined with a possible increase in diesel and cooking gas prices — inflation in India will continue to exert upward price pressures even as inflation continues stubbornly in the 9 pct zone, motivating further increases in policy interest rates by the Reserve Bank of India.

Trade and fiscal deficits continue to remain a concern in view of the oil scenario and possible subsidy overruns.

Having said that, the Indian economy continues to remain one of the most resilient as its private consumption story continues to play out. The corporate results for FY11 Q4 were not too disappointing with sales coming up 22 pct, operating profits up 20 pct whilst the bottom line at a lower 17 pct.

This could possibly be the one reason why the market has held on to these levels.

A GDP growth of 8 pct and an inflation of 9 pct will place the nominal growth at 17 pct, which means revenues should also grow at similar rates. Customs duties too could grow on the back of imports.

One would be well advised to wait and watch before concluding that moderation in manufacturing output and revenue collections is severe enough to subscribe to a gloom-and-doom scenario.

However, it’s not uncommon to hear that having given up on rising input costs, companies are more concerned about when and how much could be passed on to consumers without denting sales and market share.

With opportunities for higher efficiencies fast diminishing, protecting margins in the light of increasing commodity prices and interest rates may prove challenging to corporates. Profit estimates are being talked down to 1,200 rupees to 1,250 rupees which means the FY12 PE is about 15.

Recent statements by Bernanke clearly indicate that, withdrawal of the QE liquidity may be some time off and in fact there may be another small dose of it underway. Electoral populism will most likely prevent fiscal discipline, very similar to the situation nearer home.

Therefore, one can be sure that the money sloshing around emerging markets and driving up commodity derivative positions will continue to protect various market levels so that their valuations do not result in red numbers.

I would believe that a lot will depend on what the FIIs do because they are about 35 pct of the free floating (45 pct of total market cap of about $1.5 bln) market capitalization.

Needless to say their movements will continue to be watched closely.

In addition, it is also in our government’s interest to protect market levels so that the much needed ‘disinvestment’ budgeted at 40,000 crore rupees in FY12 can be achieved.

There are simply too many variables in the equation to hazard a guess on the market’s way forward. The domestic factors, however, it seems have ended up balancing out the global pressures, leaving the Indian market desperately looking for a reason to break out in one direction or the other.

Therefore, while as many predict, the market may in the shorter term even go lower to reflect weakness in profit estimates, a global event or even simple fatigue. The inherent competitive strengths in India’s macro story will continue to present strong medium and long-term prospects.

A correction if it at all happens will be the best opportunity for retail investors to re-enter the equity markets through the mutual fund route.

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