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Top 5 Reasons for Stock Market Correction

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On 5th November 2010, whole India was gung-ho on India growth story which saw the benchmark index close at a high of 21005-points on the BSE Sensex.

The surge in optimism, then, was supported by a record FII inflow of $6.4 billion in the preceding month of October, which accounted for nearly 1/4th of the total equity inflows during the year, at that time.

However, that’s a past now – during the ensuing 2 months, markets have witnessed a sharp crack from its highs on the back of concerns emanating from a combination of issues such as bank loans bribery scam, soaring inflation led by spiraling food prices, weak industrial output data and impending rate hike from the Reserve Bank of India.

Stock Market Fall

The 2145-point cut, which has seen Sensex dip below 19000-mark, was on the back of rigorous selling by investors which led index to tumble to a four-month closing low. Moreover, markets have posted its worst weekly loss in eight months led by a slump in interest rate sensitive sectors such as real-estate and banking.

Top Reasons for Stock Market Fall

1) Bribe-for-Loans Scandal – We don’t want it any more!

Scams, depending upon their size and nature, can have immense sentimental impact on the investors and capital markets; especially so if it has links from the corporate world.

The infamous cross-country housing loan scam has exposed the weaknesses in lending practices despite RBI boasting of prudential lending norms being followed by Indian banking fraternity. The bribe-for-loans scandal relates to a loan syndicator bribing lenders from various state-owned banks and LIC Housing Finance to get big-ticket loans sanctioned.

This act of bribery case, which unearthed nexus between the realty developers and senior management of banks through loan syndicates, sent markets into tizzy in late November as number of banking, realty and construction shares slumped by 15-20% within a matter of few days.

2) Weak Industrial Growth – Providing a reality check!

As if there was no dearth of negative news flow, the industrial output data for the month of November plunged to an 18-month low of 2.7% – compared with 11.3% for the same month of last year – on the back of unseasonal rains and working day loss during couple of months before the year end.

Industry analysts are attributing this softness in industrial numbers to moderation of demand and sluggishness in certain sectors like wood products, mining and electricity and manufacturing sector which logged in a growth of just 2.3%, as against 12.3% in Nov’09.

3) Spiraling Inflationary Pressures – Government already given up!

The UPA government has almost given-up in terms of its ability to tame accelerating food inflation at a time when highly seasonable green-pees are sold at Rs.25 per kg as against onion prices of over Rs.45 per kilogram.

No, I am not going to further propagate the highly-publicized onion prices in this article. We’ve had enough of rumblings surrounding the onions prices, by now. Let me get back to the core inflation. India’s annual rate of inflation based on WPI rose to 8.43% in December, as against 7.48% in the previous month.

The index for fuel and manufactured products rose by 1% and 0.4% respectively. Well, even if I don’t wish to touch the sensitive issue on food inflation, just see this how I am being dragged to cover this very same topic again – the index of primary articles surged by 3.5% in December and that for food products rose the fastest at 3.7% during the month.

4) Rate Hike Fears – Your EMIs could Rise further!

Oh! Yes… you might still gain if you’ve excess cash-on-hand which may fetch you extra interest on your fixed deposit investments. But, it could be a nightmare for you, if you’re one of those home loan borrowers – as RBI is likely to hike key interest rates in its policy review on January 25.

However, market pundits are divided on whether the hike to be announced by the RBI would be 25 bps or 50 bps. After the recent weak IIP data, analysts are betting on a more subdued hike of 25 bps aimed at balancing growth expectations and tackle severe price pressures. By now, stock markets have already discounted a 25 bps hike.

5) Corporate Earnings – To be hit by surging Input prices!

The earnings season has already commenced with below expectation results from Infosys Technologies. Further, with interest rates on an upward curve, a number of Indian companies that have leveraged their businesses are likely to see an up-tick in their debt servicing costs and impact on earnings to that extent.

A surge in global commodity prices is also likely to keep a check on operating profits of the India Inc. Rising input costs may put pressure on the companies to pass on the hike to the consumers, ultimately leading to tepid demand and lower off-take of consumption.

So, are you counting on this market correction as a buying opportunity?

  1. Vinod Rawat says

    nice one

  2. Vinod Rawat says

    nice one

  3. jb007 says

    Boss, Really your article for Top 5 Reasons for Stock Market Correction is very good.

    1. Viral says

      jb007,

      Thanks a lot dude.

  4. Altaf Rahman says

    Nice article Viral.

    Even in this rut there is scope for hope. Cap Goods and commodities.

    I strongly feel that you should be writing more on stock markets to benifit trak readers.

    What ever happens to stock markets, the needs of the country for infrastructure wont allow cap goods sector to relax. We need more power, roads, ports, steel plants cement plants to give better living standard to people. Investment in the above have to keep increasing. So industrial activity in teh above mentioned sectors will get a kick in the back from govt whether it likes it or not.

    Also as the stratagy of china is obvious that minerals are the building blocks for any nation, it has stopped export of minerals to outside world and increased import from other countries. We all know that China, US, Canada and Europe are building stocks of minerals for future use. For teh last 2 or 3 years Indians joined the rat race to control available stocks of commodities such as iron ore, bauxite ore, coal, nickel, copper. China is already way ahead of the race now. All the big, high quality mines are taken over already and we are left with left overs of China.

    Some companies have already sensed this and started aquiring mines outside. Like Adani, Guj. NRE Coke, Jindals, Tatas, Vedantas. Govt elephants like SAIL, NTPC, etc are still sleep walking.

    The reason for my writing the above is if we look at the long term of lets say 10-20 years those companies with power plants, steel plants, cement plants and mines will far outperform others.

    However I am still looking for your regular articles on stock markets and advise to readers on multibaggers and other promising stocks.

    Just my two paisa :)

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