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Indifference, despair and optimism—all in equal measure, and the market going nowhere. That has been the story for the past couple of months now, as conflicting news/ data flow has cost both the bulls and bears.
Indifference, despair and optimism—all in equal measure, and the market going nowhere. That has been the story for the past couple of months now, as conflicting news/ data flow has cost both the bulls and bears. (So much that some of the well-known market operators are said to have switched focus to the commodities market). Portfolio investors have been no better off.
Will the latest batch of state poll results make any difference one way or the other? Friday’s market rally suggests that day traders expect the electoral verdict to strengthen the Congress-led UPA coalition’s position, and give it a leeway for decisive policy action. But that line of thought appears to be a bit far fetched. Unlike in 2009, when the UPA came to power with a decisive majority, raising hopes of some path breaking economic reforms, the latest poll results are open to interpretation. On the positive side, you have one difficult ally (DMK) marginalized, and a convincing performance in Assam. But on the flip side, you have another difficult ally (Trinamool Congress) in a much stronger position, and also a dubious win in Kerala where the Congress seemed to had taken victory for granted.
Never mind the longer term implications of the poll verdict, but the market may have no recollection of it when trading resumes Monday.
For instance, in December 2008, when results of elections in five key states were announced on the same day, the BJP won three (Chhattisgarh, Madhya Pradesh and Rajasthan) key states and the Congress two (Mizoram, Delhi). Yet the market went on to rally 8% that week and 11% over the next one month. In contrast, when the Congress won all three states (Maharashtra, Haryana and Arunachal Pradesh) in October 2009, the market declined 5% that week, and rose a mere 1.3% over the next one month.
Past performance is no indicator of future direction. But the market is likely to be disappointed if it is pinning its hopes on some big bang policy announcements shortly, or on an impending cabinet reshuffle to end the ongoing policy paralysis.
There are far too many other contradictory factors in play at the moment. The higher-than-expected increase in benchmark interest rates by the RBI last month is a clear indication that the priority right now is to control inflation, even if at the cost of economic growth. And most economists are betting on rates climbing by another 50-75 basis points this financial year. March industrial output was better than expected, but March quarter earnings of most companies (Reliance, Infosys, Wipro to name a few) were not. Perhaps the performance may not have been all that bad, but they were disappointing in the context of the high valuations that the stocks enjoyed. Besides, signs of margin pressure, arising from higher input costs, were evident. And analysts expect a similar trend, if not worse, for the current quarter as well.
The sharp correction in commodity prices over the last ten days spells relief at a macro-level (lower oil bills) as well as at the micro-level (lower input costs for companies). But there lies the catch. A sustained downtrend in commodity prices could reflect a dour outlook on the growth prospects for the global economy, which in turn could shrink capital flows into risk assets like equities.
Some portfolio managers argue that economic data from the developed economies is far from cheery and so emerging economies with a better growth rate are the obvious investment destinations. But then, most emerging economies are grappling with high inflation, and unless they manage to tackle it, growth will fizzle out.
To cut a long story short, the election results—not much different from what most exit polls suggested—rattled some bears into covering their short positions, and allowed some of the bulls to cash out. But it could be anybody’s game on Monday.
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