Too early to bet big on markets

A reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Splendid times seem to have unleashed in Indian stock markets. Nifty touched a lifetime high of 8000 on 1 September and Sensex hit 27,225.85, an all-time high on 3 September. Nobody had the foresight to predict such levels for benchmark indices a year ago. But now, our fortune tellers aka technical analysts are certain that the bulls will ride faster and farther from these levels in the days to come.

For Navneet Munot, CIO, SBI Mutual Funds, Sensex hitting 10,000 in 10 years is not unrealistic if India Inc can deliver growth of around 15 per cent per annum, which, according to him, is not an unreasonable expectation over a long period.

However, taking these predictions with a pinch of salt is advisable for retail investors as their hard-earned money is involved. Their predictions might be true but a reality check of current market conditions sparks good reasons to stay cautious while boarding the bus of current market rally.

Needless to say domestic as well as foreign investors are betting on Prime Minister Narendra Modi-led NDA government which has successfully trumpeted its reform-oriented approach in every nook and corner of the world.

Now is the time to analyze whether the positive sentiment lurking around is hope driven or solid result driven. Looking at contracted July IIP data at 0.5% versus the 3.9% of June (revised higher from 3.4%) is enough to warrant that it is too early to stake bets on newly formed government. Though CPI inflation mildly cooled to 7.8 per cent against 7.96 per cent in the previous month but food inflation inched higher to 9.42% versus 9.36% m-o-m.

The week ahead is going to be eventful. First, markets will take stock of IIP and CPI data after opening bells tomorrow with simultaneously eying on WPI data expected to be out at noon. They will be taking note of advance tax payment by listed corporate, which is also due to be released tomorrow and will provide clues about Q2 September corporate earnings.

On Wednesday market mavens will eye crucial US Federal Reserve's monetary policy review. Woe betide the markets if Fed goes for an early rate cut as it will make Indian markets vulnerable to FII outflows leading to correction on Sensex and Nifty.

For investors who do not understand technicality of markets, it is sensible to wait for macro data of following months to come which does not reflect the overhang of UPA government’s tenure so that no confusion is felt whether the slowdown is of UPA’s making or NDA’s failure. Let the time confirm if the Modi-driven seemingly impactful India story is a fact or just the work of a fiction.   

Not impressed!!

Political gridlock is crowding out positive impact of reforms.

To the surprise and embarrassment of Finance Minister, who has been long exerting to project India as a flourishing economy among foreign investors, global credit rating agency Standard and Poor’s has retained its ‘negative’ outlook for the country which is just one notch above junk status. Though Government doesn’t agree to it and is audacious enough to acclaim that global investors hold a different view, but this audacity is like living in a fool’s paradise and is nothing more than its face-saving exercise.

Undoubtedly many financial reforms have been announced by Government since September and also the country currently experiences various green shoots like easing-out inflation even reducing most stubborn Consumer Price Inflation, increased factory output, falling gold and oil prices leading to decelerated Current Account Deficit etc. However, why the world is not still convinced to rely on these positives is no rocket science to conjecture. India’s appalling political-paralysis resulting into acute policy paralysis, a cornucopia of corruption and scams, non-transparent and archaic laws etc has severely tainted its image worldwide which might require decades to get cleaned up.

The slow pace, at which reforms undertaken by Govt. were moving ahead, got further decelerated with a Government in dock due to series of scam revelations and an opposition in revenge-mode leading to precluded Parliament. Now it is not shortcomings at economic front but at political which has derailed India’s progress. Legion of policy bills are languishing from one session to another un-tabled or un-concluded. Spate of policy-discussions have been elasticizing from one meeting to another with no consensus to be in sight. It seems political brinkmanship in India has escalated to a toxic level where legislatures have now started compromising on even their core responsibility i.e. to discuss and draft legislation. Food Security bill, land acquisition bill, FDI in insurance, Goods and Services tax including many more bills will perhaps remain stuck till new government comes in.  S&P rightly pointed out “Given the political cycle—with the next elections to be held by May 2014—and the current political gridlock, we expect only modest progress in fiscal and public sector reforms. For example, reforms of fertilizer subsidies, introduction of a nationwide goods and services tax, easing of restrictions on foreign ownership in various sectors such as banking and insurance sectors, will take time.”

It seems that India has taken an oath to always flow against the wind. In the aftermath of global financial crisis when the whole world geared up to restructure banking industry, India didn’t pay heed to it. Now when all major countries are coming forward to clamp down on tax havens, India doesn’t seem to be taking this call seriously. When every other country is enthused with the green shoots in the global economy and trying to make the most of it, India is clogged with unnecessary political altercation at home and losing on the most opportune time to recover from the economic meltdown.

S&P must not be blamed for India’s negative rating, in fact, it would be no wonder even if it is downgraded to junk status given the disturbing trend of political logjam leading to legislation logjam which has severely dampened India’s already fading credibility at international forum. Global investors, who look for stable and transparent legislative regime for their long-term investment plan, no more sees India as a prospective investment-destination. They have gone wary, uninterested and indifferent towards Indian economy. It is high time that Government ignites its dormant insight and modestly accepts what S&P has stated. Government, which is so enthusiastically branding itself at home through ‘Bharat-Nirman’ campaign, would do well if it channelizes even a tad of this enthuse to improvise its depressing global-branding instead of national-branding.