Remote-controlled Indian markets
For last few weeks or months rather, we have seen a great deal of uncertainty and unexpectedness coming into the Indian stock markets. During the days, when markets across the world collapse, we usually see Indian markets outperforming. On the contrary though, during the good days in global markets, we see muted response from Indian stock markets.

The last week trading carried both the instances. Monday morning has seen markets across the globe collapsing one after another on account of recessionary fears. Asian markets, including India, were down by more than 10% at one point before we see a strong buying support coming into Indian markets at lower levels and markets finally closed down by just 2% down, while the peers closed down by more than 10%.

On the flip side, the Indian markets gave a muted response on Wednesday, when Asia made a strong recovery on the back of tremendous rally in US markets overnight. The Indian markets closed down just a percentage up, while the other Asian markets were up by more than 8%.

What are the reasons behind such behavior? Is our markets totally governed by few institutions, who at will, can change the direction at any given day or we have started to run ahead of the curve?

The former has a strong case, since FIIs have been ruling our markets for last few years. If they sell, the markets fall. During the days, they don’t sell or do cherry picking, the markets go up. Currently, our Domestic Institutions and Life Insurance companies are not strong enough to compete with Foreign Institutions. Hence, a long term policy must be envisaged by the government to promote the equity route through Mutual Funds route and life insurances. Also, the young generation which doesn’t have any financial cushion in the form of pension, can be encouraged to save for longer term through equity route, since the best returns that any mode of investments can provide is the equity, provided it is done with knowledge and with a long term horizon.

RBI Rate Cut
Let’s come back to the stock markets. RBI has announced three major policy decisions on Saturday which will bring cheers to the banks and the stock markets. First, it has reduced the CRR ratio by 100 bps to 6%. Thus, it has provided around additional liquidity of 40000 crores Rs into the financial system. Secondly, it has decreased the repo rate by 50 bps. This step would ensure that banks can now borrow from RBI at lower rates, hence relieving them from desperate liquidity crunch.

Third step is the reduction of SLR (Statutory Liquidity Ratio) by 100 bps to 24%. SLR is the percentage of total funds that banks need to keep in the form of liquid instruments like Cash, Government bonds, and other safe mode of investments. It is said that the high SLR ratio in Indian Banking System saved the domestic banks from the sub-prime mess, since they never left with enough funds to invest in exotic overseas instruments after fulfilling the domestic needs. Now, RBI has reduced the SLR ratio to help banks tide over the extra-ordinary liquidity crunch, which was evident from the fact that Call Money rates shot to 22% in Inter-bank lending on Friday.

Strengthened Global Markets
The bulls worldwide have shown tremendous come back during the last week. The Dow Jones and Nasdaq have seen the biggest weekly gains since 1974 during the last week bull run. This also helped the Indian markets making a recovery of more than 14% during last week, despite some disappointing quarterly numbers.

For Indian stock markets, this would come as a big relief, since the fear of global recession and redemption pressure on hedge funds were putting the selling pressure on stocks. The stronger global markets will help in rebuilding the investors’ faith in equities and one might see less selling pressure on the equities than before.

US Recession
The fear of US recession is now clear in sight. Earlier, there were only reports of forthcoming recession but now the data about jobs, consumer spending, Inflation has clearly suggested that recession has finally arrived on US shores.

And it seems like a long path of consolidation for US before it can really stand up and start spending. First, the US people need to clear their outstanding debts on credit cards, homes, personal loans, before they can again storm the markets and hence for spending, hence boosting the other economies. Thus, it would be good that US exporting economies must now learn to live in an era of lower growth and lower inflation as well.

Economies Delinking
Till now, USA was driving the economies worldwide through exhaustive consumer spending and almost every ship moved towards US shores. But housing bubble burst has put brakes on the relentless, rather reckless spending. This may now force emerging economies like India, China or Brazil to look out for alternative grounds to sustain their growth rate. The first target could be Europe, which will now see more attention in the Sales and marketing Division of big corporate residing in Asia.

Another scenario which is emerging out is the bilateral trade agreements between countries. Every country exports things that it carries and imports things that it lacks. For instance, India has IT expertise that no other country has. Similarly, India doesn’t have sufficient Oil. Now, India may try signing bilateral agreements with Middle-East countries to push their IT into their regions and in return, buy Oil from these countries. This will help both the economies to grow together. If this indeed happens, would end the US monopoly in global trade and will ensure, more sustainable and long term growth for various countries.

Nervous Stock Markets
The stock markets, though, have been trying to revive, may continue to remain nervous due to various uncertain factors like US recession, sub-prime impact, increased raw materials cost, etc. Hence, one may continue to see the volatility prevalent in the market for some more time.

In Indian stock markets, the sector that may outperform in the longer term is the Information Technology sector. The sector was among the early ones to get the beating due to rich valuations that the companies had been enjoying. But things have changed now and IT stocks look attractive now.

The biggest advantage with IT companies have been the strong business model, they carry. The companies like Infosys or TCS may face some quarters of slowdown but are most likely to recover from it. These companies are sitting rich on cash and also they have the required capability and the expertise to survive this slowdown.

Also, we have seen many IT companies diversifying themselves across regions as well as domains. The US is no longer an attractive destination to work with. Similarly, BFSI domain (Banking and Finance) is not the only domain to serve with. Undoubtly, it will take some time to diversify, but once it happens, we will see rich valuations coming back again into this sector.

Book Profits at regular Intervals
It is said that “Markets behave irrational before it becomes rational again. The only problem is that they remain irrational for days more than you can remain solvent”.

Hence, one is advised to book profits and losses at regular intervals. Do not try to emulate Warren Buffet or George Soros. These guys have ample money to remain sleepy for longer time duration that I or you can remain. Hence, if you bought something a week back when Nifty was at 2200, the time to book partial profits is today.

Wishing you a great period of investing!!!
Sayonara