The old adage while operating the equity market is quite Zen-like? it says never laugh at the person who has a differing view from you.
The reasoning is simple; the market would not exist if all had a similar view. There would be no one willing to purchase what somebody had to sell and, therefore, a market would not have existed.
But then, the nature of human interpretations lends itself to market longevity as there are differing opinions.
And at the moment, when the collective opinion is that the markets are being tested and hence every news item is interpreted as bad news, chances of the markets slipping are greater. So when the Securities & Exchange Board of India (Sebi) announced measures to strengthen the market base, they tanked. And amongst other things, denizens blamed the lack of change in the participatory notes regulations. Investment experts strongly advise investors (not traders) to stay away from such distortions or ?noise?.
The market is clearly in the ?fear and revulsion? stage, as ENAM Research would put it. It typically follows the ?hope? phase, where the market tends to miss out the slowdown signals and waits for a revival of the good times, just like what happened in the early part of the year.
And when money supply tightens, rates rise and earnings start falling, fear sets in. So when the Sensex touched 12,500 levels, something quite unfathomable a year ago, there were talks of it scraping the 10,000 levels. And, many even bought into it. Some of these fears still exist.
However, the aversion leads into the last leg of the bear phase, where the earnings growth comes back into play, credit starts easing off, and this marks the end of the bear phase and the starting of a new virtuous swing.
And though things would look to be optimistic, there is a lot of time left for the virtuosity to set in. Earnings growth has fallen considerably and is negative on a sequential basis and single digit on an annual basis. At the moment, despite crude oil cooling down, inflation rules high and is expected to remain that way till the at least the beginning of 2009. This means that the interest rates would tend to have an upward bias until that moment.
All of this is bound to have a considerable pressure on the earnings. A lot many corporates resorted to window-dressing in the first quarter to shore up the numbers, but sooner, the markets will start re-rating such companies. However, one can only expect more companies resorting to financial jugglery. The new drift towards reworking, scaling down, postponement, and even cancellation of projects could also be hitting the markets soon. The fear and revulsion is set to intensify.
In such a market, traders stand to gain by leveraging on the volatility and taking smart positions in companies that could gain from strong positive news and make an exit at near-term peaks. In fact, this is the exact pattern that the market is depicting. So when the market hit a bottom of 12,575 on July 16, the market started trading upwards, ahead of political developments.
After all, the odds of the government falling were far lower, if continuing historical trends depict that. The market moved up to 14,942 on July 23, two days after the trust vote, and then sharply correct to 13,792 level on July 29. So we had a 19% surge in six days, followed by an 8% dip in another six days.
Such swings are expected to continue. Traders currently wait for the reform package to unfold and as they happen, the markets would keep swinging both ways. Key announcements expected are the finalisation of the 3G licence norms, insurance sector reform, and, perhaps, a review of some of the regulations on the FII front. Expecting a sustained surge might be rather premature.
Contrary to some sections of the investment community announcing the resurgence of the market, there is still some time left for value to emerge. India has corrected, but still remains a tad expensive than its peers in the region, is what most overseas investors would tell you.
While that is the general overall feeling, this is also a time for bargain-hunting. From here on, and lower, bargains would keep surfacing. And the strategy is for a bottom-up approach. Clearly, while investing, management quality and the attractiveness of the sector, will start. After all, the real Indian economy is in good shape, and is taking a breather. And even if the government?s books look to go out of hand, the corporate sector and importantly, the household sector, could provide support.
So overall, while in the short-run there would be strong differences of opinion, leading to large swings, the long-term view of most is sanguine still. And this means that at some point in time, when inflation and rates ease, there will be more people with a positive opinion. And therefore, as a Zen master would put it, if you know where you stand and where you are facing, you could plan your journey well. In this market, unlike the earlier bull-phase, it becomes important to know where you stand (trader or investor) and where you are facing (your investment time frame). Keeping this clear will help investors manoeuvre through the uncertainty.