Markets may fall further from current levels

Today March 14th 2008
Nifty closes at 4623.6
Sensex shaves off close to 770 points to close at 15357 points
India being a high beta market, any major fall in global indices gets magnified and exacerbated to a larger extent in our country. As they say when it rains, It pours, thats the exact description for the manner in which we are falling down like nine pins into a bottomless pit each day. All the stories of India having been decoupled from global cues have been thrown out of the window, all the more supported by the domestic institutions and sovereign wealth funds who are sitting on huge piles of cash and are unwilling to invest at current levels even if they see value and enough margin of safety(MOS) to their investments.

The fortunes for the week ahead look pretty bleak. Every relief rally that has happened ever since the lows of Jan 22nd have been pure short covering rather than any new buying emerging in the markets. Even as i stare at the F&O data for today fresh short positions have been initiated on the Nifty and the bellweather stock Reliance Industries which only indicate a further fall tommorrow whatever be the global cues. Even thought the Nasdaq and DOW seem to be hovering around a slightly positive territory at the moment, we can expect profit booking to emerge at every high on the Nifty. The technical trading levels for tomorrow are expected to be rangebound between 4690-4801 on the upside and 4527-4402 on the downside. The nifty needs to convincingly close above 4812 for a intermediary bullish trend to emerge on the cards.

An analysis of the present situation is provided below:
1. Markets are in a state of confusion over the earnings momentum going forward and are taking cognisance of the fact that there may be downgrades in a few sectors. Growth may slowdown in cement, banking, commodities and real estate. In case of the cement sector, incremental supply to the tune of 60 million tonnes is coming in as against an incremental demand of 35-40 million tonnes in 2009. This would definitely result in fall in pricing power for cement companies. The demand supply gap would get narrowed down completely by 2009. As for the real estate sector, though there has been tremendous supply of real estate over the past few years demand has toned down due to rising interest rates. We have already observed prices in the NCR (national capital region) fall by 15-20%. Banking stocks especially the PSU banks are a great buy at current levels provided we have enough clarity on the loan waiver scheme and the reimbursement of the same to the banks in the form of oil bonds. The positive side of this loan waiver is that the banks are cleansed of all their past NPA's in one go. However, whether this step by the finance minister will result in more defaults from multiple sectors is something only the future will decide. But all said and done at a price to book value of 1.1-1.3x banking scrips do look attractive. Steel as such is getting into a bearish mode with disappointing resultsfrom Corus. If we strip the consolidated results into standalone factions one would find that the numbers from Corus have been a clear thumbs down and if that’s the tone set going forward, it will definitely have a rub off effect on all other steel counters.

2. Global cues with crude oil touching $110 per barrel, over the top commodity prices and the collapse of Carlyle group due to losses in the fixed income market are not at all comforting signs.

3. The exposure of Indian corporates to the credit derivatives market, foreign currency and commodity hedging are still unclear and the cracks are beginning to show up with ICICI and L&T being the first casualties to these exotic derivatives.

4. Neither the Railway Budget nor the "Aam aadmi" Budget of PC had anything much for the corporate world to cheer about. Markets like reforms and there was no mention of it in the budget. When the economic survey document promised so much on privatisation/divestment and deregulation, not an iota of the same was discussed in the budget leaving us all exasperated enough to remind us that the latter shall always remain a non event as far as our country goes. On the contrary the Short term capital gains tax on share trading was hiked to 15% to bring it in line with DDT (Dividend Distribution tax). The objective of the same, though welcome, being investors should develop discipline and hold on to their investments for the longer term, the timing of the levy has been vicious that too when the markets are at an all time low. Some thought process could have gone into the same to bring about this provision after a level of sanity had returned to the markets. As a result of this provision, we expect more sell offs from HNI and other short term traders prior to March 31st as the provision comes into effect from April 1st onwards. The provisions on STT being now directly allowed as a deduction against income rather than against the tax liability as a rebate is also a negative for the markets as it forces the arbitrage players out of the market and will reduce volumes in the momentum counters.

5. IIP (Index of Industrial production) numbers have been dismal at 5.3% as against anestimated 7.7%. This clearly points to a Q3 slowdown if the IIP nos have to be believed. The poor show on the manufacturing and capital goods front has put immense pressure on the markets. Investors are being scared away from pumping fresh money into the markets.

6. GDP estimates are also getting lowered down to 7%. Though the structural growth story continues in India, it has been hampered by cyclical pressures and with both the government and RBI focussing on giving top priority to inflation management rather than maintaining or improving growth, its difficult indeed to achieve a 10% growth as aimed by this UPA government.

7. Though most of the capital goods companies have maintained a positive stance on theirorder book position, their capex plans will definitely get affected going forward with credit spreads having widened all across the globe. Debt doesn’t come cheap anymore and this will hamper most of the expansion plans of Indian companies. Even M&A deals may get affected what with most PE firms and investment bankers having burnt their fingers in the subprime crisis. Loan syndication is a difficult task henceforth. The primary market in India too has not been supportive with the dismal response to two heavyweight IPO's like Emaar MGF and Wockhardt hospitals forcing them to withdraw their offers.

8. The impact cost of trading has become so high that even a small short position created by an FII triggers or accentuates a bigger fall in the markets. The trading is so lacklustre at the moment that dealers are busy enjoying their favourite past time during trading hours. I for one saw my broker watching a Rajnikanth movie on Sun TV today....Can anyone imagine such a scenario prior to Jan 21st. The situation is pathetic to say the least.

As far as the markets are concerned with all the negatives crowding around, the only saviour can be a good show on the advance tax numbers by Corporate India that would be released next week, a little bit of help from FED in cutting interest rates further and a stellar outperformance in Q3 results from the core sectors which however seems highly unlikely.

Most of us belong to the "sunrise" investing generation which has not seen long periods of market volatility or a bearish phase of the likes of 1992-2002. Having seen a continuos secular bull run from 2002 to 2007 , we lack the patience and conviction that a rakesh jhunjhunwala or a ramesh damani posessed to emerge out as "Dhandho investors".