Markets may fall below 14000 post results season

The results season will be nearing its end next week with some more important companies due to announce their results in the coming week. So far results have largely been in line with market expectations with no major outperformance from any sector. Corporate earnings have grown in the range of 15% -20% with very few companies churning out a disappointing outlook going forward. Given the stunted growth of the economy with tight fiscal/monetary conditions and the pain from subprime crisis not yet having receded, equities as an asset class will have a muted performance for the rest of 2008. Domestically too, we have our own derivatives exposure which is hurting corporates and banks alike. ICAI has actually helped the investing community by making it mandatory for companies to disclose their derivative exposures well in advance of the stipulated 2011 deadline. However there may be a number of cases where these provisions may not be accounted for in the respective quarterly results as marked to market losses. Companies have the option of disclosing such exposures in their notes to accounts. The problem here for investors is that they will not be able to access the notes to accounts of companies until six months from now. So there will be some clarity emerging on derivatives only in second quarter of FY 09. Already SBI has come out with its estimate of its total client exposure to derivatives at Rs.672 crore. This is quite a large amount for a single bank and considering that a number of small and medium companies have taken speculative trades in these currency swaps, the small and midcap listed universe would be an interesting space to watch out for as to the impact of these MTM losses on their bottomline. A classic recent example is eastern silk industries, a fundamentally strong fabric company that has been reporting decent numbers in the past growing at 25% p.a. The entire bottomline has been wiped out this quarter due to MTM losses on currency derivatives. The market was merciless on this stock which collapsed 30% from its existing lows in the last couple of days. We can expect the impact of MTM losses to subside if the dollar strengthens or rebounds against other currencies.

Its also shocking to see that a company like BHEL has fallen 30% from its highs post its Q4 results. A company with such a huge revenue visibility for over 5-6 yrs, its order book at 80000 crore, with an expected addition of 40000 crore this year alone, getting knocked down inspite of posting a decent 17% growth YoY shows the lack of patience and persistence among the investing diaspora. A stock cannot get kncoked of 25-30% when fundamentals are intact with no slowdown in order book growth. The company does face margin pressure and has postponed the booking of some earnings to the next quarter. Fund managers are acting like day traders looking for the slightest negative news in listed corporates. They are sitting on a cash pile of 20000 crore. Certain mutual funds are even cashed out to the extent of 10%. The point here is when one has invested 90% of his funds at higher levels and seen the markets crash by 30%, whats the point in sitting on the balance 10%. FII flows will follow domestic institutions. These FII's who have taken out close to $5 billion from Indian markets since Jan 2008 will not return until domestic institutions bring sanity back to the markets.
As for the market levels, at the moment we have moved beyond 5100 and managed to close above that level. But this being the first day of the new series, position build up generally tends to happen. Therefore we should not read too much into these rallies. How we proceed from here is very important. The 200 day moving average stands at 5031 and we have bottomed out below these levels thrice so far only to stage intermediate relief rallies. The next level to watch out for will be 5393. Given the lack of major positive triggers from corporates and with growth expected to moderate to 7% in the wake of global and domestic factors, we may fall to lower levels again. Everytime we have had bear markets in the past, we have fallen more than 50% from the previous highs. This time around, we have not yet seen the sensex slipping below 12K and unless global events worsen badly leading to a greater risk aversion, we can strongly believe that we are not in a bear market. The above factors will have to be watched closely. I personally believe that the bull market is set to resume in Q3 2009.