The meltdown

During the second half of the month of May there was a sudden meltdown on Indian stock market. Though the fall was rapid, it cannot be said that it was totally unexpected. In fact it was expected for quite some time that stock markets in India would correct themselves and the correction was simply not happening. Every time the investor sold the stocks with the expectation of correction, the markets moved up fast within a next few days, making the investor feel sorry. More and more foreign funds were coming in and Indian story was all over the world. Indian economy was performing well and the global economy was booming adding more potential to India’s economic progress.

In the month of May, this picture has not changed but the sentiments have changed for sure. The global commodity markets, which were experiencing unprecedented boom, suddenly gave away. This resulted in a melt down of metal and some commodity stocks all over the globe. It immediately affected the other stocks across the stock markets. In the last couple of years, the world markets have become dearer as regards stocks, properties, commodities and even metals. It was expected that time tested rules of economics would ultimately take over and would correct the markets. Probably that process has started. The metals and some commodities have started the correction. The U.S. kept its pursuit of dear money policy. Recent increase in its interest rates made investment in U.S. more attractive for foreign funds. They have started partially moving their investments to U.S. and Europe. This in a way has started making the developing markets less attractive. The stock markets in Asia and in the developing countries had negative effect of this movement. In the month of May, the major stock markets in U.S. and Europe corrected around by 5% to 10%, but the developing countries suffered a big jolt. Their markets corrected 10% to 20% in a matter of two weeks, which was a large fall by any standard. It probably proved the old saying, ‘What goes up fast also comes down fast’.

Still most of us believe that Indian growth story is intact. The latest figure of GDP growth for the financial year ended on 31st March 2006 is 8.4%, which is robust by all means. If the rain God blesses the country for this year as well, it is likely that similar growth will continue for the year 2007. The Indian companies have become adventurous and their adventures will continue even in 2007. Based on the developments during the year, Indian economy should grow between 7% and 8.5%. This is a good number for a large economy. Indian companies are doing well and most of them will do well during 2007.

Stock markets

It cannot be denied that sentiments have changed in the stock markets in India in the second half of May. Caution has taken over the jubilant mood and the mood may continue for the next couple of months. This correction in the market has triggered because of reduction of exposure of FIIs to Indian markets. The hedge fund and the FIIs are increasing their allocation to U.S. and some European developed countries, which may reduce their allocation of investable funds to India and other developing economies. This can cause some selling pressure in near future. As hedge funds and FIIs have fairly large holdings in the blue chips, it can adversely impact the stock indices.

The stock markets in India will be volatile during the next few months. Though there will be some rallies, the markets may breach the sensex level of 10000. Many FIIs have opined that fair level of the sensex is 8000 to 9000. I personally doubt whether the sensex can go down to the level below 8500 in the near future unless there is some major adverse happening in the globe. The downtrend in the stock markets has more adversely affected the mid cap and small cap stocks than the large cap stocks. These stocks are more vulnerable to fluctuations and will remain so in the near future. The markets will show a reasonable opportunity to buy stocks of good companies for long-term investment. At 9000 levels, it will be a good opportunity to buy stocks with sound fundamentals for investment. Indian stock markets are looking better over medium to long-term investment horizon. Still, investors should not rush in for new investments. In case of a fall, they need not panic and may start accumulating good stocks at the sensex level of less than 10000.

Property markets

Properties have still kept their upward movements. The recent property boom was partly funded by profits of the stock markets. The stock markets have reacted now. In case of drying up of profits from the stock markets, there is likelihood of property market slowing down. Properties may not react as fast as stock market but there will be some restriction to its upward movement. If the stock market continues its current mood, the property markets will start correcting within the next six months. Caution is advised for the property investment. Investors holding large investments in the properties can start booking partial profits.

Foreign exchange

Euro and GBP have strengthened against Indian Rupee. Though US $ is not strong on its own, it has appreciated against the Indian currency, more because the FIIs have sold net stocks worth about 1.6 billion US $ in the last month. The rupee has gone down by about 4% in the last few weeks. As India is holding large quantities of foreign exchange reserves, why such a small amount of flight of capital should affect the Indian currency is a question. The out flow of FII funds may continue for some more time. The high oil prices in the international markets are already causing pressure on Indian currency. Rupee may remain weak against US dollar and most of the major currencies in the near future, unless Foreign Direct Investment (FDI) in India increases at a high speed.

Debt

In the current scenario of the markets across the globe, investment in debt is a good option. The liquidity, which has been driving up the stock prices, is likely to get dried up in the near future. It can cause a substantial upward pressure on the interest rates and a downward pressure on stocks and even commodity prices. The rates of interest are hardening across the globe and they may harden further in the near future. Though investment in debt does not give tax advantage, it can offer reasonable returns and a greater safety. Debt can be the flavour of the near future and the investors may do well to invest in various debt instruments for steady returns.