Indian Stock Markets along with most of the developed and developing world clearly in ‘Bear Territory…’

36.5% of their January peak, well past five months into the fall, the markets have continued their losing spree. China and India have ended the first half of Calendar 2008 as the worst performing markets. Last years’ class toppers are this year’s laggards. Dow and FTSE also have crossed into the bear zone usually defined as 20% off from their peak. In the last 26 years, this is the worst performance of the world markets in the first half of any calendar year.

• Increase supply: Apart from a lame increase by Saudi Arabia of 200,000 barrels a day which has been quickly offset by drop in Nigeria, Iran and threats from Libya to cut production to 50% there is lack of political will in the OPEC countries. Oil is big business and has little to do with compassion or emotions. The Indian finance minister’s appeal to Oil Ministers of the producing countries to raise production on moral grounds as poor countries are finding it difficult to bear the burden is unlikely to find a willing ear
• Demand destruction: In the short run the demand for oil is inelastic. The wheels of the world economy move on oil and while there has been a lot of talk of alternative energy sources, fossil fuels still have no credible alternative. It is Oil that makes the world go around and if prices remain this high - in the medium to long-term, the world will find alternatives or change habits but these adjustments take long and do not happen overnight. The US accounts for over 24% of world oil demand and with pump prices above $4 a gallon already some effects of demand coming off is being seen. Europe and Japan the demand is in control. China and India although accounting only for 9% and 3% respectively are the only economies where demand is growing rapidly. With both governments now reducing subsidies and passing on the burden to the consumers (the Indian pump prices are around the same they are in Europe) there will be a gradual slowdown in consumption.
• Increase Interest Rates: At 2% US Interest rates and a weakening dollar, it is cheap money and good rationale for speculators and needs to be reversed. Europe has already raised rates by 25bps and as inflation is now affecting the developed world, this may only be the start.
  
  

• This is Showtime for The Great Indian Political Circus. The government will be kept busy scrambling to put their support numbers together and in politics there is no take without give. All kinds of adjustments and balancing acts will be done with a sole view of staying in power as long as they can and getting the ground ready for the elections next year. This will keep the market nervous.
• Inflation in an election year is something no incumbent government would like to deal with. Especially, if you have come in power on promises of inclusive growth as the vast majority of low-income groups people in the urban and rural areas are definitely not going to look at this with a forgiving eye. This will keep interest rates up; which is not something the market appreciates.
• High Commodity Prices made worse with a falling rupee, High Interest Rates, Spiraling wage bills to compensate for high inflation and high real estate rentals. These are never really ideal conditions for corporates to perform. The growth in net profits from the very tall levels of 45% in December ’06 are likely to be south of 15% in March ’09.
• We have put ourselves into a difficult position on the fiscal front and monetary policies are blunt in their effect. The governments inability to proceed with further reforms and a total lack of infrastructure spend have contributed to the difficult position we are in. With a fiscal deficit, where it is, the new government will find its hands tied behind their back as large government spending on infrastructure will be required to stimulate the economy and provide the platform on which India can continue shining.
  
  

• If you already have a portfolio please examine it carefully. Historically the bear markets post Harshad Mehta, Ketan Parekh and the Dotcom bust have shown us two irrefutable trends.
  • Stocks which were the favorites in the rally can lose almost 90% value from their peaks. While this figure looks scary its well possible with some stocks in real estate, brokerage, etc. having already lost almost 75%. So let me buy on the “how-low-can-it-get” argument may work against you.
  • When the next rally happens, the last rallies heroes remain laggards. Taking a loss is a difficult proposition for anybody but there is little difference between paper loss and actual loss. First we all must accept our losses and learn to cut it well in time. Portfolios need to be reshuffled as holding on to a wrong stock will dig you deeper into the hole. Take an expert’s help to guide you on this, as sometimes it is better to have some one with the right experience advise you impartially and without emotions.
• If you are sitting on cash it is not an enviable position either. Your deposits are getting you negative returns considering inflation. It is impossible to predict accurately what the market bottom is and retracing upto 56-58% from the top is also what has been historically experienced. We have yet lost 36.5% from the top and while I am of the view that it is unlikely to go all the way there, fact is it can and before investing you must know that risk. Value is surely emerging at these levels but is it time yet is the question. Depending upon your risk appetite and conviction you may either decide to invest 10% now and keep building as the trend firms up or wait to buy a little expensive but more confirmed as even now the primary trend remains firmly south. What is very critical is to select the right industries and stocks within them.