Weekly Outloot for the Indian Stock Markets - 15th to 19th September, 2008

Unforgettable last week
The last week has been a trying one for the Indian Stock Markets. After a tremendous surge on Monday on account of NSG deal, markets fell down like nine pins and closed beaten down to the weekly lows. Nifty, which surged to 4500 on Monday, fell down below 4300 mark at the time of close on Friday.

The current volatility provides ominous signs for the Indian equities. The most worrying factor for the markets is their inability to discount the good news. Low Inflation, Low Crude oil, NSG deal were strong enough signs for the markets to gain and make new higher levels. Yet the FIIs relentless selling pulled down the markets every time an attempt is being made to reach new highs.

Some reports have indicated that the current bout of selling is made by Lehman group and its associates to cash out their holdings in their final attempt to save themselves from bankruptcy. If this report has some strong base, then these must be worrying signs for Indian markets, since Lehman & Co. have substantial stake in various Indian companies. The investors must be hoping that Lehman Brothers sell their entire stakes in Indian equities along with other assets to the acquiring company because if it doesn’t happen and Lehman is forced to sell their stake in the open markets, then the share prices of these companies could touch new lows, which will further dent the bruised sentiments of the investors.

Let’s analyze and gauge various indicators that may influence the Indian markets in the days ahead…

Re-$ movement
Rupee has depreciated steeply against the dollar, which has neutralized the gains that oil marketing companies may have on lower Crude oil. The Greenback is currently trading at 45.60 Rs. Levels.

IT companies, which would have gained on account of higher dollar, are unable to do so because of worries that US based financial companies will be spending less on IT in the next 2-3 years. Though, the silver lining could be the BPO / ITES companies, which will stand to gain on higher dollar. There is a strong hope that Outsourcing concept will again come into shore as overseas companies will be transferring some of their non-critical tasks to India to further reduce their input costs.

Double-digit Inflation
Despite the low inflation numbers for last 3 weeks, the inflation is still in double-digits, which remains a worrying factor. Any novice can understand that equities will not perform, till the time; inflation goes below 10% mark.

We must also remember that inflation going down on account of higher base effect is not the solution of this problem since it will be the setting of a new benchmark of prices for the essential products. There should be a genuine effect to either reduce the demand or increase the supply of products. The government should also reduce the prices of fuel to stimulate the companies whose input costs have risen due to high oil prices.

Hence, the inflation should come down to 6-7% mark, before it can make a positive impact on the markets. Any hope of change in long-term view from “sell” to “buy” will only occur if inflation comes to 5-6% levels.

High Interest rates
Looking at the historical figures, equities never had a genuine long term rally in the shadow of high interest rates. Also, the companies debt cost will rise on account of high interest rates. The maximum hit was suffered by Finance and Real-Estate companies. Real-Estate companies, who received doubly-hit due to high material costs and interest rates, have depreciated maximum in every round of selling.

Hence, any investor who holds real-estate stocks need to be patient enough to earn something out of their investments. Any chance of averaging out could be as risky, as having a fresh purchase, since downside still exists in these stocks.

Crude Oil
Two months back, Crude was the major threatening factor. Sadly though, even after falling near to 30% from their all-time highs, the equities have not responded at all. The markets are still trading at the same levels or lower, as were of two months back.

Personally though, I still feel that Crude can provide a big impetus to the markets in the near-term, especially when it sustains below 100$ a barrel.

Financial Turmoil in US
It has been more than a year since the US financial problem has come into shore. We must not forget that the roots of these problems lie in Greenspan era and it will surely take more than 3-4 years to amend the mistakes. Bear Sterns and Lehman Brothers have been the victims of the problem. Various reports indicate that Merill Lynch could be the next victim. These US based financial institutions have a major stake in the Indian bourses. Hence, markets will remain under pressure till the time financial sky gets cleared.

Next Week could be volatile
The coming week will see a renewed attempt by Bulls to take the charge. Also FIIs, who have been selling consistently for last few days may pause a bit to gauge the situation. Though, any bad news from US, especially regarding Hurricane Ike or Lehman Brothers, may see another round of selling coming into bourses all over Asia including India as well.

Hence, traders can hedge by buying Nifty 4000 Puts and buy quality stocks that are in offing at low prices. For instance, ICICI Bank, REL, Ranbaxy are trading at interesting levels and can see gaining in the short term.

In the mid cap space, MIC Electronics, DCB, Axis Bank, Karuturi Networks, TTML can see making gains.

Another interesting strategy for the week is to buy Nifty 4000 Puts and 4400 Calls. Somehow, it seems that almost every bad news has been discounted by the bourses and any positive news will be welcome by the markets. If it doesn’t react to the good news and goes down, then 4000 Puts will put into play. Alternatively, any good news on Crude Oil front (below 100$), Lehman Sale out (finally!!), Low Inflation (around 11%) can give a stimulus to the market and it may re-attempt to touch 4400 /4500 levels on Nifty.

What are your views on the Indian stock markets, do you have any stocks that one can buy, do you agree / disagree to my views, then please feel free to write in your comments by clicking Comments below.

Wishing you a great week of investing!!