A joke in the equity markets is that when everyone expects the markets to move up, a correction phase sets in and vice-versa. During the just concluded week, the domestic stock markets, like their global peers, had this happy situation of proving the experts wrong and scaled a level of 19,000 (Sensex) after a fairly long time. The domestic markets' recovery story is not in isolation and is in line with the good performances shown by other markets.
Challenges ahead
But what should be heartening for investors, is the fact that the recovery has come at a time when there are clear signs of non-performances on the government's front. It is difficult to remember when the government made any major announcements last. Caught by various challenges ranging from battling corruption to inflation, the government at the centre hasn't found time to focus on the reforms process. In fact, many attributed the lack of foreign institutional investor (FII) participation in the month of June to the lack of focus on governance.
However, the turnaround in mood aided by a drop in crude oil price has been a pleasant surprise though one is not sure how long the good mood will continue on Dalal Street.
Results season factor
The major worry for the markets in the coming weeks is the announcements of the quarterly results. While a below-par performance has already been factored in, the actual announcements when published are unlikely to be ignored. The high cost of funds has been a dampener of sorts though it has managed to serve the central bank's aim of cooling down the economy. Hence, it will be interesting to observe the impact of the tight money policy during the last few quarters on the performance of India Inc.
A few sectors that would be interesting to watch are banking, automobile, and chemicals and fertilizers. Banking has been under pressure during the previous quarter due to a spike in interest rates. The rise in deposit rates was much steeper than that in lending rates in the last few months and there were also clear signs of a slowdown in the economy. As an indicator of things, the credit growth projections have been scaled down to 18-20 percent from an earlier target of over 20 percent by many bankers.
Markets hold potential
Despite the lowerthan-expected growth rate, India still offers an opportunity for investors as the overall growth rate of the economy continues to be impressive. On the back of lack of turnaround in other economies like the US, the global investors are likely to find the domestic markets attractive over the long term. However, the risk for this story to sustain would be the political risk as the government seems to be hopping from one crisis to another. Hence, the global investors have been blowing hot and cold in the last few months.
From a domestic and retail investors' point of view, the next few months, like in the recent past, will have to be managed on a more active basis as volatility has been on a wide range. An exit and entry strategy at regular intervals could boost the overall portfolio returns though timing them is never an easy task.
Debt attractive
Investors can look at the option of exiting at the 20,000 levels and be in debt as the fixed returns products in themselves have been offering good returns. Despite their tax component, they have the potential to offer 5-6 percent returns, and if one were to take into account a profit booking strategy, the overall returns can be in double digits.
For instance, if an equity investor reinvests his holding after an 8-10 percent dip in prices, the overall returns can be in the range of 15-16 percent which is very good in the current environment. The key, of course, is to get the timing right, which requires plenty of patience.
