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Why are the markets down?

It is better to plan for the long term and buy potential stocks at every fall


There have been major corrections in the stock markets all over the world. All major markets have corrected significantly from their peak levels. Major indices in the domestic market - Sensex and Nifty - also saw large corrections over the last couple of months and are currently trading below their 200-day moving averages. The Sensex is at around 16,000 and the Nifty is at around 4,800 levels - more than 20 percent lower than their peak levels. The mid-cap and small-cap stocks are the worst hit in this market correction and this is reflected in the performance of mid-cap and small-cap indices.



There are a series of events/factors that resulted in this global meltdown of stock markets. Here are some of the more significant factors that had a negative impact on the domestic markets.


US sub-prime issue
The meltdown in the markets world over triggered by the US sub-prime news is one. The meltdown worsened thanks to the weak economic data followed by views and predictions of a slowdown in the US economy. The US dollar is depreciating against all major world currencies. This has forced the foreign investors to sell their equity investments in the emerging markets (many foreign funds have borrowed money from markets where interest rates are very low to invest in emerging markets).


Rising inflation and high oil prices
The rising crude oil prices forced the government to raise the prices of fuel in the domestic market. However, the rise in petrol and diesel prices is miniscule in comparison to rising crude oil prices at the global level. Crude is trading around USD 107 per barrel. This rise in domestic fuel prices coupled with higher prices of basic commodities has pushed the inflation rate to above five percent. The rising inflation rate could be another cause of concern for investors as it will require some tough actions from the Reserve Bank of India (RBI) and the government.


Budget Impact
Shares of banking counters led the market fall after the budget announcement this year. The Finance Minister announced a Rs 60,000 crore agriculture loan write-off in this year's budget proposal which impacted the sentiments of investors negatively.


Corporate News
There has been negative news from some large corporate. These announcements from large corporate impacted the market sentiments adversely. The market is full of pessimistic news and views. Its fall over the last couple of months has impacted the sentiments of investors negatively. Foreign institutional investors (FII) are net sellers in the year 2008 and poor buying support from domestic mutual funds has led to a free fall in the markets at many trading sessions.


Market Outlook
Many analysts and expert believe that the domestic economy is not strongly correlated with a US recession and sub-prime issues there. But still, the markets cannot be completely insulated from global factors. Looking at the current situation, the sentiments in the markets look a bit weak. Market rallies are short and most of them end in intra-day or in couple of days. There are sellers at every level in the market. Chances of any quick/fast rally look quite difficult (like what was seen last year). The market should at best remain range bound in the short to medium terms - a few weeks to a couple of months.


It is advisable for short term and risk-averse traders to stay away from the market. Long-term investors (with an investment horizon of one to three years) can look for value buying in the market, especially in index/large-cap stocks that are available at quite lower rates from their peak levels. Long-term investors should accumulate identified stocks in small quantities at every market correction and slowly try to build their equity portfolio.


Market sentiments on low ebb

News of slowdown in growth rate affects market sentiments negatively


The stock markets were in a state of panic last week. The markets were threatening to hit new lows here. The sentiments across global markets were extremely weak and bearish. The mood was gloomy with investors were questioning whether it made sense to hold on to stocks even for the long term. A recession in the US and probable decline in the domestic GDP growth were the main contributors to the gloomy scenario.


The US Fed and index of industrial production (IIP) numbers occupied centre stage during the week. The Fed, in a move to increase liquidity in the markets, had announced a new Term Securities Lending Facility. Under this facility, it will lend up to $ 200 billion of treasury securities to primary dealers for a 28-day term. The Federal Reserve said it would lend treasuries in exchange for mortgage backed securities and other debt that all but collapsed in the sub-prime mortgage crisis. Basically it was exchanging high quality government instruments for near junk securities. So all the instruments whose value has been eroded are taken away by the Fed and would be replaced by highly regarded US treasuries.


This was an innovative way to bring relief to the credit markets as cutting interest rates would only fuel inflation further. This amount was to replace losses suffered by financial institutions. Global financial institutions have written down almost $200 billion due to the credit crisis. Further, big US investment banks are expected to report more losses when they issue first quarter results. The stock markets rallied in reaction to this news but the optimism did not last long. The Fed's action obviously is welcome but investors did not see it as a long-term solution.

Apart from global worries, the domestic stock markets had to confront another set of bad news with the release of the economic data. The numbers indicate a decline in all important production estimates. The industrial growth was at 5.3 percent this January as compared to 11.6 percent last year. Manufacturing industries grew at 5.9 percent as compared to 12.35 percent last year. Manufacturing industries accounts for 80 percent of IIP. This shows that the domestic economy is indeed slowing down.

So far, the theory was, as the domestic GDP growth was high, the stock markets would recover quickly. But, with the slowing down of growth, the very platform on which the story is built - high GDP growth - becomes shaky. Hence, the market has not only the global problems to worry about, but also a slowing economy and lower earnings here. Now, there are new worries about leading banks' exposure to sub-prime. And many large corporate are expected to show losses in their derivatives exposures.

All the negative news has affected sentiments very badly. The market mood has moved since January 2008 from optimism to pessimism, and then to despair. It will be a long time before investors, hurt by these falling markets, gather courage to start investing in stock markets again.

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