A Positive Start And A Bounce Back... But Be Careful

For some time in the beginning, one thought that the market had really brushed aside the contraction in IIP for the third month in a row. But then reality set in and it went downhill to close the day in the negative. This was anyways quite a possible scenario given that global cues too were positive but shaky. Well, the biggest bet that the market is right now playing on is the revival of growth and its sustainability.

Economic growth is the single most important factor that is driving markets, not just in India but the world over. The problem is not whether growth is happening or not. It is surely happening, but maybe the pace is something to worry about. For an economy growing at around near double digits only a couple of years ago, a growth of below 5% should surely be a worrisome factor.

All that talk about the potential that the Indian economy has for growing at pace which can surpass the best over the years is looking to sound like a sham. One has to understand the basic fact that there is no way the fundamentals of an economy can change over just a couple of years.

If the potential for growth was there in the year 2000 and demonstrated through the years until 2010 (even the in the midst of the worst financial crisis to have hit the world in modern times) there is no way that a fundamental shift could have happened in the economy to pull it down so badly. You have to wait until tide turns around. This will surely happen, once the extraneous uncertainties (political instability and lack of a decisive leadership) are gone. Patience remains the key word for the long term investor.

On a short to medium term basis there will always be something or the other which will come your way and play a role pushing the markets on either side. The number of agencies and institutions that are presently in existence will offer an immense opportunity for the markets to react based on their blabber. If the World Bank and the International Monetary Fund come out with a gloomy picture of the economy going forward, there will be an equally opposing and strong report from an institution like Standard Chartered which will talk about a 5% plus growth for the economy in the next financial year. investors ought to take a measured view of all that it thrown at them.

Here is something that should help you believe in what is said above. A report by the United Nations categorically says that the government is ‘unlikely’ to meet its fiscal deficit target for FY14. Low growth and a higher subsidy burden is what it blames for this. This is so damn contradictory to what we have been hearing from various quarters including the Finance Ministry and the RBI, that you would be better off not paying attention to it.

Once in the open, the report is sure to flutter some feathers and hit the markets. That is where an exact game of judgement begins and could help you safeguard your portfolio and market returns. The Finance Minister is in a tremendous pressure to deliver what is promised on the fiscal side. This pressure comes from the fact that we are in an election year. But more than that, developments on the ground are suggesting that the target will be achievable this year. Whatever the basis of that report, one ought to take it with a pinch of salt in comparison to the reality on ground. After all, the government has mopped up a whopping Rs 61000 crore through the spectrum auction held over the past 10 days. It clearly tells us that the government Balance Sheet could be in a better shape than what was being expected.

So coming to where the week is slated close, European stocks gave in gains registered over the past six trading sessions following earnings reports and some disappointing data from the US, while on the contrary, US stocks rose shrugging off those economic data points and focusing on good earnings reported by some companies.

Asian stocks are picking up cues from the US market trend and Chinese data points. Except for the Shanghai Composite which is reeling under higher inflationary pressures seen in China all other markets are trading in the green. The Japanese Nikkei is up, though only marginally while Taiwan and Korea are trading strongly. Indonesia and Hong Kong are somewhere in between with an average 0.35% rise in the benchmark indices as of now  while Singapore and Malaysia look undecided though are trading with a positive bias. The SGX Nifty is trading up 30 points.

All of the above sets the stage for a softly positive open for the Indian markets. A bounce back from the lows hit yesterday is quite possible today. The next big trigger will come in the form of the Vote On Account to be presented on Monday. Cautious trades could lead to lower volumes as investors and traders are likely to sit on the sidelines to avoid any shocks that may be in store on Monday.