The markets movement in India in past couple of weeks confirms
that our hopes and fears are both coming true.
We had hoped that Indian markets will benefit from the global
risk-on mood and participate in the rally that is conspicuously reminiscent of
1999-2001 global rally. The benchmark equity indices appear set to rise another
5% in this melee.
We had feared that the corporate fundamentals may not improve in
any substantial measure and hence would only lend a feeble support to the
rising valuations; much like 1999-2001.
It is important to note that whenever the long term market
returns have significantly outperformed the earnings growth we have seen sharp
corrections in the market.
(Source: BSE, InvesTrekk Global Research)
In our view, if the fall in commodity prices and cost of capital
does not result in improved profitability over next 2-3 quarters and Nifty
continues to trade above 6000 level, we shall see a substantial correction of
20-25% in equity prices.
The YTD weakness in commodities and AUD could be an early
indicator of the coming pain in commodities’ world. We have heard some distress
calls from Indonesia, Mexico, Australia, Russia, Brazil, and South Africa.
Deepening recession in EU area and slowing demand in China indicate that this
distress may only rise in the coming months.
So as we said a few days ago, do not be a party pooper, enjoy
your dinner, but make sure you are not too late to return home. (Also read: Enjoy
your dinner, but don’t get too late and …and save my
fears!)
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