Markets This Week: A Round Up

Was the end of last year a good one or is the beginning of the New Year auspicious. After benchmark indices hit a new all time high on Muhurat trading, the markets were looking poised for a super start to the new trading year and a good run ahead. However, action during the first week of trading in the new Samvat is turning out to be a completely different story than what was expected. When the markets were consistently rising towards the fag end of the last trading year (Samvat 2069), talks of a new Bull Run were gaining ground. But the first week has turned out to be something like catching up with reality.

Some call it ‘consolidation’, some say its ‘profit booking at higher levels’ and still some others say it’s ‘a brief pause’. But as we have been pointing out, there is one term which aptly can describe market action over the past few days – reality. No matter how much of ebullience investors may have exhibited over the last week of the preceding year, they surely seem to have realised the pitfalls of getting overly excited in a market like this. There is no way that markets can sustain their upward momentum, unless a clear all round picture of a turnaround in the economic fortunes emerges. This can happen only if and when the bottlenecks to growth are cleared.

One of the biggest problems that the economy in general and as a consequence the markets have faced is that of government inaction or as they fashionably call it, is ‘a policy paralysis’. This critical problem seemed to have come to an end with the government clearing a whole lot of stalled (big) projects over the past couple of months. Well, clearing a project is one thing and getting it off the ground, just another. There are many underlying factors, which are even now, not conclusively in favour of these projects getting off the ground, higher interest rates being one of them and rather the most important one. Obviously all this has taken the markets to where they belonged over the past one week.

The market always looks for triggers and in the present circumstances, news flows have played a very important role in shaping the course of the markets. Just a couple of days back, media headlines were screaming about the worlds’ largest investment bank, Goldman Sachs upgrading India to marketweight from underweight on the perception that BJP-led National Democratic Alliance “could prevail” in the 2014 elections while adding that better corporate profitability and signs of an early pickup in cyclical sectors have also played a part. Normally, the markets would have jumped to latch on to such a positive public demonstration of confidence by someone of the likes of Goldman. Surprisingly, they traded volatile, and, in fact, even lost ground to end in the red that day.

Lets consider that to be an aberration and forget it. But what is transpiring after that, is keeping the Goldman call in sharp focus. A leading business daily has published some very vocal statements of Commerce and Industry Minister, Anand Sharma wherein the honourable minister hit out at Goldman for “messing around with India’s domestic politics”. “I think banks such as Goldman Sachs should stay focused only on doing what they claim to specialize in.” Sharma has been reported to be saying.

There are a whole lot of other things that Mr Sharma has said about Goldman. For now, what is stated above is sufficient to build a context in which we are quoting him. Barely a day after Goldman went positive on the prospects of a BJP led government coming to power at the centre, another big gun from the west warned of a rating cut if the new government fails to set its house in order. Standard & Poor’s has maintained its ‘negative’ outlook on India’s sovereign rating, which is currently at the lowest investment grade and also warned that it may revise it downwards to ‘speculative’ grade should the new government fail to put things in order on the economic front.

While the markets didn’t react to Goldman’s optimism, it surely lost nerve on S&P’s pessimism. The market always reacts in a disproportionate manner to factors that can influence it. The degree of pessimistic reactions to bad news is always higher than the degree of optimistic reactions to good news flows. But the point that remains is that, there was no reason for S&P to have come up with such a jibe against India at this point in time. Or, there is probably something more to it, than just countering an opponents view. The political slugfest has already hurt the Indian economy, which is struggling to regain its growth path and in turn the Indian market, which is fighting volatility amid uncertainty. Another round of it will only push us into an abyss of no return. Time Indian politics and governance improves for the better.

The markets have considerably come off their highs over a very short period of trading since the beginning of the new Samvat. Caution still remains the key word for investors. The next week will emerge with a new set of triggers and a new set of challenges too. It is no way going to be a smooth ride for the indices. Play the defensives and keep the speculative tendencies aside for the time being. Have a nice weekend!