In the aftermath of the tidal wave that shattered global financial edifices, it is time to repair and rebuild and heal. The healing and rebuilding process will definitely have its pains and the worst might not be over for capital markets. However, things do look brighter than they were a couple of months ago, reckon market experts.
2009 is expected to bring back smiles in the markets; it will be a year of consolidation for the domestic equity markets, though the world economic performance may depreciate further. Raamdeo Agrawal, director of Motilal Oswal Financial Services, said, ?After the debacle in Indian equity markets in 2008, we assume that the outlook of 2009 will be one of consolidation. Overall, we might see investors entering markets once again. Slowly, but gradually, most of the parameters like inflation and interest rates are falling in place, making way for a reasonably strong rally in 2009.?
Many expect the market to have another correction in January, as corporate earnings set in.
?The market has factored in the fact that earnings growth will be low in the third and last quarters. But a lower than estimated growth rate could have a telling impact,? Anup Bagchi, executive director with ICICI Securities told FE. There is a strong inventory build up, one that corporates have produced with high input costs. Now, with other costs coming down, customers will demand price cuts and it will be a challenge for the industry to account for the costs incurred earlier and also cut prices. So the ability to deliver earnings growth in this scenario will be the thing that will drive sentiment.
Though historically, elections have not had a telling long-term impact on markets, investors will look out for the Lok Sabha elections as well. Sudip Bandyopadhyay, director and CEO, Reliance Money, said, ?The first six months of 2009 will remain crucial as there will be general elections and markets are likely to remain in a range-bound manner. We might see a clearer picture after the new government comes in and the policies it adopts; they might have some positive impact on domestic markets.?
Despite the Indian equity market dipping by over 50% in 2008, Bandyopadhyay feels that the India growth story is still intact. This, since the country?s gross domestic product (GDP) is expected to grow at 6-7% and valuations of shares are very attractive as this juncture.
The global economy is in chaos following the crisis in US sub-prime markets, resulting crises in the financial sector world-wide. Governments of several countries have announced fiscal aid and bail-out packages to protect their respective economies from sliding into deeper recession. The global turmoil has had an impact on the Indian economy in the form of a liquidity crunch and a fall in demand.
The Reserve Bank of India (RBI) has, over the period of time, taken measures to infuse liquidity in the sluggish market and is likely to continue to take strong steps in 2009. Dinesh Thakkar, CMD, Angel Broking, said, ?By lowering interest rates and providing fiscal stimulus, the RBI and the government have set the wheels in motion, which should revive demand and consumer spending in our under-penetrated markets.?
But, an analyst from a leading broking house said that though there are regular measures from the central bank to boost the economy, history suggests that it takes around 6-12 months for the real economy to respond to actions of the RBI and stimulus given in other forms to pump the economy. So, we might see stock markets rally from somewhere around March 2009.
Bagchi, executive director with ICICI Securities, thinks that the spread between the corporate bonds and government bonds still remains high. The signal for the credit flow into the corporate system will come when this spread or difference decreases.
?And this could be the real trigger for the markets,? he said. This will mean that corporates will start expanding again and operating at a lower capital cost; earnings will improve and the markets will take note of this.
Inflation hit nerw highs in 2008, but as the year ended the inflation was down once gain to single digits. Expectations are that by the time we close this financial year in March 2009, inflation may be back to below 5%. It is, therefore, no surprise that of late, all steps taken by the RBI are in the direction to kick-start the economy so that we once again move towards a GDP growth of 9%.
PK Agarwal, president, research at Bonanza Portfolio, said, ?As a result of these developments, macro economic fundamentals are now present in such positive combination. This lays the foundation for a strong rally in stock markets. We might see a low interest rate environment and strong domestic demand for goods and services in the coming weeks.?
The Indian economy faced enormous challenges last year, due to erosion of confidence in the financial system and risk aversion. There was liquidation of assets by the investors, which affected the markets very badly. This reflected in the withdrawal of funds by foreign institutional investors (FIIs). There was a very sharp sell-off during September and October of 2008. FIIs took more than $13 billion out of India during the year.
?Major outflows from FII?s have gone been in the months of October and November last year. Now, we assume that they will start entering Indian markets as this is the only market which is attractive at this point of time. Currently, US markets are negative and the European markets are marginally positive, so I think we might have some relief on the FII front. However, the first two quarters will remain a concern for the Indian bourses,? added Bandyopadhyay.
Given the current situation in global markets, Raamdeo Agrawal, feels that there are strong chances of witnessing withdrawals of funds by FIIs in 2009, but not to the same level as 2008.
Fortunately, crash in crude oil and commodity prices has brought relief. This has helped bring down inflation to more moderate 6%. With chances of lower interest rates coupled with dipping inflation and decline in commodity prices, dealers in markets sense that banking, FMCG and pharma stocks will remain hot property throughout 2009.
On the other hand, Agrawal says that investors should only look at various factors such as investing in cash rich companies and companies that have robust business models.
?At this point, valuations of sectors such as banking and infrastructure are very attractive; we will not see these valuations in the near future. So, we suggest that investors should invest 20% of their money at this time and then slowly enter the markets after there is some clarity,? said Bandyopadhyay.
An analyst from a leading broking house said that the BSE Sensex might remain in range of range of 9500 to 12000 in the current year. Further, an upward rally can be expected only after more visibility emerges on the global economic front. Overall, the mood for the markets remains sanguine, laced with a lot of concern.
Spurring back
• Governments of several countries have announced fiscal aid and bail-out packages to protect their respective economies
• The global turmoil has had an impact on the Indian economy in the form of a liquidity crunch and a fall in demand
• The RBI has taken measures to infuse liquidity in the sluggish market and is likely to continue to take steps in 2009
• Some analysts feel measures from the central bank will take around 6-12 months to produce visible results
• The stock markets, therefore, might rally from somewhere around March 2009
• In addition, expectations are that by the time we close this financial year in March 2009, inflation may be back to below 5%
• Analysts assume that FIIs will start entering Indian markets as this is the only market which is attractive at this point in time
•Dealers sense that banking, FMCG and pharma will remain hot throughout 2009
