At the start of the calendar year 2010, Sensex was perched at 17,500 levels. Since then, inflows from FIIs has crossed the magical Rs.1 lakh crore mark – an achievement by no means less than a gold medal for the Indian stock markets and clearly a sign of confidence among the global funds in the India Growth story. This gush of investment wind has taken the benchmark Sensex past 20,000 levels – which sums up to a decent 15% rally since the start of the year.
Further, as more and more emerging markets – such as Thailand, Brazil and South Korea – impose curbs on cheap overseas funds flow from developed nations; a substantial chunk of this flood of money could find its way into the Indian markets. This sharp flow of money could render the Indian currency more volatile in the light of increased inflows and outgo of capital at some point of time in future.
Investors must not lose sight of the crucial Law of Gravity which says – whatever goes up, has to come down! Moreover, the higher the markets move northward, steeper would be the fall on the downside. Specifically, disappointing IIP data for the month of August that were released recently could well be a cautionary sign for the investors to remain on their toes going forward.
After recording strong industrial output growth of 15.2% in July, a fall in IIP numbers to just 5.9% (the lowest in past 15 months) has surprised the analysts – questioning the sustainability of the current bout of recovery.
Further, the sharp fluctuations in the IIP numbers over the last few months – 15.2% in April, 5.8% in June, 15.2% in July and again 5.9% in August – has cast a doubt on the veracity and reliability of the numbers. However, close observers of the key industrial data has pointed out that the volatility in industrial growth rates has been driven by the capital goods segment, which grew by 72% in July and contracted by 2.6% in August.
Additionally, equity analysts have expressed concerns about the heady levels of benchmark indices that have witnessed a sharp run-up over the last couple of months – powered by market euphoria and the prevailing bout of liquidity wave (Read as Rs.1 lakh crore of hot FII money in 9-months). Concerns are also being raised about the market’s ability to absorb the mega-IPO offering from the state-owned Coal India Ltd starting from October 18.
At current levels, markets have already factored in most of the positives including good monsoon and better fiscal scenario of the domestic economy. However, the earnings season – which is round the corner – might prove to be a good reality check to test the integrity and strength of the markets over the next few weeks. Thus, for once, the fundamentals and earning prospects might try to over-whelm the liquidity momentum and excess euphoria prevailing in the markets.
When the market sentiment is controlled by the liquidity – it is not the right time for investments and could well prove out to be more of a trading market.
Probably, this is not the time for stock market bravado !