In our last few sessions, we had asked the investors to be cautious and also revealed that there is no much upside likely in the near future. Yes, we supported our views by proper reasoning and what happened in the last week was witnessed by everyone. We had concerns about the uncertain political front and over the valuation in the short-term, which were not looking cheap. But now, in addition to these factors there are some other global concerns, that have impacted the Indian markets. The most important concern is, after a good amount of economic growth in the last three to four years, most of the countries are facing inflationary concern. With most of the capacities running near to the full, policy makers are struggling to tackle inflationary pressures. There is scarcity of land to equipment and with good amount of liquidity many Central banks are facing inflationary pressures. The labour cost has also increased and that can be justified from the fact that in US the labour cost has increased at the faster rate than expected. As a result, after the data was released Dow Jones Industrial Average also had to see a fall for following three days.
Now as we talk about the global events, European Central Bank raised the interest rates by 25 basis points to 4 per cent and the impact of the same was seen in most of the European Stocks. At this instant, the correction has taken place on account of the measures taken by the policy makers and we feel that it is good for the markets. The reason is, if the market does not react to the measures taken, then what may follow is a series of measures, which may trigger much higher fall in the market. Another concern is that the five markets vis Australia, Indonesia, Singapore, South Korea and Philippines are trading at their all time high. Now, with global inflationary pressure, it needs to be seen how much sustainable the rally in these markets is? Anything which goes up has to come down and that holds true for the markets also. With higher correlation to the other markets the scenario for the Indian market also seems to be uncertain in near term. Even fundamentally the Indian markets are not looking cheap. We are trading at the 18x of the FY08E earnings, while the other markets like South Korea, Taiwan, Thailand and Malaysia are available at 13-15x, so there is a concern over the valuations in the short- term. Currently here in India the input costs have increased and the impact of the same will be seen in the quarters to come. Even the impact of rising interest cost can be seen in the next quarter, so things are not looking good at least in the short-term.
At this moment, the government is taking strong actions to control inflation but has not attained much success. Although the inflation figures have come down to 5.06 per cent (as on week ended May19,'07) compared to 5.27 per cent of the previous week, we think it needs to be seen, how the policy makers handle the situation when the we are witnessing a GDP growth of 9.4 per cent. GDP growth figures as on June01,'07 reveal that it is growing by 9.4 per cent as compared to estimated 9.2 per cent. This is the highest growth in the last 18 years and that too after the government taking strong liquidity control. Yes, we have seen 10.5 per cent growth in 1988-89 but that was on the lower base on account of drought faced in the prior year. Now, if inflation does not come down then we may expect a rate hike in the near future as the rumours are strongly suggesting and this will add to more worries.
Here we have talked only about the short term worries and we still maintain our stand of long term bullishness. Those who are long investors should not worry and should go for the value picking.
Regarding the institutional investments the FII and MF have been on the positive side for the last week. The flow is expected to be strong with most of the FII having interest in mega IPO's tapping the market. But at the time of these IPOs we may face some liquidity problem as DLF and ICICI Bank IPOs will suck out Rs 30000 crore from the market. The liquidity problem is expected to be there for a while, as there will be demand for these counters in the secondary market also.
Regarding the market movement we feel that there is still no much upside seen in the near future. The reasons are liquidity pressure and some profit booking. In the recent past the market has consolidated above the 14000 level. But with weak global market cues and expected liquidity pressure we will not be surprised if the market breaches the 14000 level. Yes, it is true that we can’t take a one day fall (as happened on June 06,’07) as the direction, for in the past the market has proved most of them wrong who have taken call on the one day fall, for predicting the direction in the market. But according to us there are some reasons why we are suggesting that there will be some downside in the market. Our long term view is still bullish not withstanding some major hiccups. We will advise the investors to stick to the blue chips stocks irrespective of the short-term movements in the market.
