How will the year 2009 unfold? With the nightmarish memories of 2008 yet to fade away, every investor seems to be looking for an answer to this question. However, looking to the uncertainties surrounding the environment, it is extremely difficult for any analyst, including myself, to offer a straight answer. My mind and heart are constantly in a state of conflict. Whereas the heart says the worst seems to be over, the mind refuses to accept the same. And an almost 25 per cent steady rise in the markets has left everyone baffled.
A typical bear market rally is usually sharp and shortlived. But nothing of the sort is being witnessed in the current rally taking the markets past 10,000 – perhaps due to the compelling valuations. In contrast, the volumes have nothing to cheer about. However, there has been significant increase in retail participation coupled with good buying interest shown by FIIs – though their activity appears to be concentrated in the F&O segment. Such has been the upsurge that some of the stocks have witnessed 100 per cent gains over a short period of two-three weeks.
So, should I believe that the markets may not revisit the October lows – barring some profit booking off and on? If some astrological predictions are to be believed, the markets may see a level of as high as 15,000-16,000 by February-end. It is also said that an election-bound UPA government will do every trick to prop up the markets to a respectable level before announcing polls so that some of the gloom and pessimism of small investors can be mitigated.
There are plenty of other reasons to believe that the markets may be on the road to recovery for the bottom is reached when 10 out of 10 analysts as also everyone on the street turn bearish about the markets and actually stay away from them. Also, the markets are said to be bottoming out when they start ignoring successive bouts of negative news. Precisely this appears to have been happening in the last couple of weeks.
The government’s announcement of a monetary and fiscal package is also likely to have a positive impact. The monetary measures are likely to release considerable liquidity in the system, allowing banks to lend at lower rates. The additional expenditure, largely directed towards infrastructure, should quicken the pace of investments while tax cuts should lead to reduction in prices and both together should stimulate demand. These measures combined with Pay Commission recommendations-based payouts should provide the necessary impetus.
A sharper than expected fall in inflation, and the likelihood of it falling further due to impact of cut in fuel prices is a welcome relief. What is more welcome is that food prices have also started coming down. Declining inflation gives much needed elbow room to stimulating measures especially when global commodity prices are softening. With FIIs selling abating and even the lowest estimates predicting a 6 per cent growth rate for India, eventually investors will have to allocate capital towards those economies where they see value appreciation over capital risk in Western countries. The near-zero target rates announced by the Federal Reserve and tempting Indian valuations, especially in sectors such as infrastructure, further strengthens the belief that the worst is over.
But the package announced by the government with more to follow can at best be termed as necessary but not a sufficient condition for reversing the downturn in the second half of the year, given that growth will most likely continue to decline until at least the first half of 2009. The Indian markets may therefore not stay buoyant and the current rally may end abruptly any moment. The extension of the current bear market rally may indeed set the stage for the next crash.
The Index of Industrial Production was 0.4 per cent lower than it was a year ago. This is the first such decline since 1993. Exports also fell 12 per cent in October with a sharp fall recorded in auto sales as well. Though India is far less dependent on exports, such unexpected decline in industrial output suggests that domestic demand too is sharply shrinking. All this points to conditions of industrial recession in the country. With imports remaining high, the pressure on balance of payments can be immense in days to come.
The problems may get further compounded with the sharp slowdown in tax revenue, both direct and indirect. The December quarter may produce very dismal results for at least some of the sectors, including IT. Also, with the present fiscal in dire straits, there are hardly any options left with the present government. The international scenario is no different with the Federal Reserve announcing a near-zero rate policy. One wonders what other options are left with the world economies.
But, looking to the comparative position, the next correction can best be your last chance to pick good stocks for decent returns in two-three years’ time. Wishing you a happy and prosperous 2009.
The Indian markets may therefore not stay buoyant and the current rally may end abruptly any moment. The extension of the current bear market rally may indeed set the stage for the next crash
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
