The Shift in Stock Market Landscape

It was the standard stock market investment advice: watch oil prices. But the commodity no longer makes or breaks the market. Though oil prices have found a floor in the $105-$110 range, after sliding in the previous two months, stock market investment advisors now have another peg to base their forecasts: the global slowdown. In other words: fears of a global slowdown induced by the combined effect of high commodity prices, which triggered inflationary trend across the globe, and the headwinds of the weak spending by the consumers in US, the world’s largest export market. Though US posted a surprisingly strong quarter, it was primarily the performance of the country’s export sector that pulled up the performance.

But the export boost for the US economy may not pull up world economy till it recovers from the effects of the credit crunch. The reason: the countries importing US goods are feeling the slowdown heat and the dollar recovering from it lows. How does the global slowdown affect India? We have already seen our economy turning sour and so also the stock market. But is there more pain left for us?

Yes, probably, but not much. We have already seen a slide in growth rates to 7%-plus from 9% of the last fiscal. At worst, we may see another 1 percentage points chipped off our growth rate, between 6%-7%. And coming to Indian stock markets, it would be a reasonable guess to say that the markets will remain rangebound and occasionally go up or down, depending on specific cues. Can we play in the markets in this situation? In the absence of a long-term trend, it would be difficult to trade in these volatile times. The best advice would be to lie low for any longer term trend to emerge. Can we at least pick out a sector? It would also be a difficult guess, because the external cues would have a lot of say over it. If oil, for example, starts its upward trend, the inflation would spike again, impacting the interest-rate sensitive stocks like banking and realty.

But what about IT when rupee is remaining weak, boosting their earnings in rupee terms? The rupee is unlikely to regain strength soon. The public finances of the country are under strain, with combined effect of oil and fertilizer subsidies, higher payouts to babus and the loan waiver. Importantly, the FIIs are still not entering the Indian markets with the same pace as compared to that when they fled. But again, the biggest markets for Indian IT companies are unlikely to recover soon. On top of that the weaker earnings of multinationals from other markets are also beginning to sag.

Does that mean that you should completely stay away from the markets till there is some good news? Definitely not. In the market rubble you can still find many stocks that are fundamentally strong but reeling under the economic weakness. Some of them you might have liked to own when the market was moving higher but shied away because of higher valuations. Take a dip into these stocks and even more if they weaken further but don’t expect to see short term gains. Build a portfolio of good fundamental stocks and then wait to see the markets turning the corner. But don’t give up the chance of occasional profit booking, if you are lucky enough.