I’ll prefer to stay away from equity market for next two months!

Unusual technicalities, high inflation and relatively more liquid other Asian relatively less priced markets will keep the upper side in sensational index limited. Though market shows strength despite a fall last fortnight, it's more driven by liquidity. The liquidity which has largely accumulated as a confluence of the U.S. Federal Reserve and European Central Bank unprecedented debt monetization activities. Consistent high inflation and no sign of reduction in inflation expectation in near future as too much money has found safe heavens in commodities,raising substantially the cost of living to lower per capita purchasing parity, will force central banks to raise the borrowing cost strategically. In case it's not done, it will be worse for the economy in long run. Indian market has overdone its part in 2010 and I am of opinion that its time that money will flow more towards Singaporean and Vietnamese market in coming months. My personal opinion is that SENSEX will touch 17000 before the end of this quarter. Till then I will be cautiously remain invested in gold, copper, and probably take a fresh position in commodity market of natural gas and oil.

US economic growth will remain slow and US dollar will depreciate!

The chief reason for the slow economic growth of US is closely related to exports and the dollar. South Korea, Russia, and other emerging markets that went through severe crises earlier usually underwent a sharp depreciation in the inflation-adjusted value of the currency, making them hypercompetitive, at least for a while. This makes it easier to replace imports with domestic goods and services and much more attractive to export.

In contrast, the global financial crisis actually strengthened the U.S. dollar as it was seen as a haven, although the dollar has fallen somewhat from its recent peak against major trading partners.

It takes time for a big economy like the U.S. to export its way back to growth; exports were only 12 percent and 13 percent of gross domestic product in 2007 and 2008, respectively, while imports were 17 percent and 18 percent of GDP.

Yet the logic of today's economy is pushing the dollar down and exports up and, in turn, aiding the businesses that compete against imports. There are three forces at work.

First, the coming stand-off between the administration and Congress rightly worries investors. The Republicans have had a weak record on fiscal responsibility over the past 30 years, while the Democrats have failed to explain even to themselves how the fiscal stimulus prevented the biggest financial shock since 1929 from becoming another Great Depression.

US have a serious issue with the budget deficit but no prospect that this will be dealt with in the foreseeable future. American politics are increasingly seen as dysfunctional by international investors.

Second, with unemployment obstinately high and fiscal policy on ice, the Federal Reserve will continue to push down long-term interest rates. Further rounds of quantitative easing will tend to weaken the dollar.

Third, emerging-market economies are already booming again and demanding the kinds of upscale goods and services that the U.S. is capable of exporting. These emerging markets would like to resist currency appreciation; they prefer to keep their current accounts in surplus, following the Chinese model. This may work for a while, but in this case they will accumulate even more foreign-exchange holdings and, given the stance of U.S. policies, these governments will surely diversify more of their reserves out of dollars.

Global savings will increasingly be parked in Europe, so the key issue is European fiscal solvency. There are some potential bumps in that road, notably Ireland. But while Europe may not boom, it probably won't default on any sovereign debt.

The dollar is, therefore, likely to depreciate against all floating currencies. If this happens, the impact on U.S. interest rates will be minimal because the Fed will continue its easing. Inflation may rise slightly but high unemployment means the impact will be small, perhaps not even to the 2 percent annual rate that modern central banks quietly prefer.

Drown in Sensex... Well you need a short break...

Through the last quarter of 2007, India seemed to have “decoupled” from the US market. The mindless day to day correlation with the Dow and Nasdaq seemed to have been snapped. Sadly it wasn't an enduring decoupling as we seem to have recoupled again. We are back to the same old grind : eagerly waiting for global market cues every morning and promptly falling in line.

So is decoupling dead? Yes and no. First, even the staunchest proponents of decoupling would agree that it is wishful to expect emerging markets to not blink at all as the US economy faces up to the recession that the world has been fearing for the last one year. This is no empty debate now, nor a distant possibility : it seems to be right upon us. As the bad news gets worse, the bulls throw in the towel and hunker down for a rough patch, a last bit of capitulation always happens. While this capitulation plays out, some of the panic is bound to spill over to markets like ours. As may be happening now.

The important distinction is that this collateral damage is not necessarily economic in nature but in terms of sentiment and liquidity. On the margin, some institutions will sell stocks in all markets and raise cash. That may hurt us. This money will probably return later to chase growth in this part of the world, which is precisely when the decoupling will play out again. But that may have to wait for a bit, till our economic and corporate performance can establish that growth in India is not dependent on the US. And till the panic has subsided to the extent that global investors can think rationally and realise that they cannot take their money back to the "safety of their homes' as their home is where the fire rages.

So decoupling is not dead, merely interrupted or deferred. It's a matter of timing. If, indeed, the US has 2 or 3 quarters of negative growth, starting this quarter, my guess is that all global markets will move in a synchronised fashion for the first leg of that painful period. Then, markets like India and China (unless it starts tightening) will bottom out well before the rest and start outperforming. Decoupling, then, will be back, after a short break.

Memories tend to be too short and our greed too much!!

The thing about life is that one makes mistakes. Many mistakes were made in the second half of 2007 and those sins have to be washed away by blood, such is the way of financial markets. Some participants will go down under and never be able to get back to the market again but most will survive. The pain will linger for many months, maybe years but lessons have to be learnt. Every such debacle has lessons for us and the sooner we forget them the more we suffer.

The first lesson is not to let stock price performance become the sole reason for buying, a mistake which was made in abundance in the last 3 months. What couldn't be explained by fundamentals was credited to liquidity. The present lost all relevance as people chose to focus on the distant future, perhaps simply because the present could never justify those ticker prices; only a hazy dream of the future could. Traders and investors had no time for fundamental analysts, in many cases they were labelled "cribbing fools". Chartists became the most celebrated tribe on the street as only they could see and predict the one way run to glory for many of the hot stocks even as fundamental watchers cringed at valuations....till the music stopped. Don't get me wrong, charts do work in trending markets but once stock prices veer away completely from fundamental value, people need to get careful. But they never are. Now that the blinkers are off, people should ask themselves why stocks like RNRL, Ispat, RPL, Essar oil and Nagarjuna fertilisers have lost 50-70% of their value. It is simply because their stock prices had snapped all connection with underlying business fundamentals, earnings and value. Their stock prices became the only reasons for buying them which works for a while but not forever.

The other big lesson, one which should have been driven in earlier in May 2006, is the danger of overextending oneself in the futures market. The lure of stock futures is easy to understand. Put in some margin, take a big exposure on a fast moving stock, make a killing when prices shoot up. Repeat exercise. Just that people forgot that prices may also come down and at a pace which noone can even imagine, maybe their friendly stockbrokers forgot to tell them that part of the story. The result : unbridled speculation that ran into lakhs of crores, excesses that we are paying for today. Even this fall will not cure investors of their love for futures speculation but if at least some amount of caution is injected it would have been a worthwhile learning. Futures are not toys for amateurs, they are time bombs in the hands of inexpert and inexperienced traders, it's only a matter of when the fuse runs out.

The other learning which I hope will play out in the future, as it has in the past, is that it pays to be brave in times of panic such as these. If I was allowed to invest myself , which I am not, I would have no hesitation in deploying serious money into the market today, knowing fully well that prices may fall more tomorrow. And I would be standing there tomorrow to buy more of the same, till my money ran out. India is going to be a terrific stock market story for many years to come, even an intermediate bearish patch cannot shake that conviction of mine. At best, one will have to wait a bit for the returns to follow. That's alright. You are happy to put money in a bank FD and then wait for one full year to collect that measly 8%, aren't you? Then why does the stock market need to give you 20% every month? In the last one year, I haven't seen so many good stocks trade at such mouth watering levels. Forget trading, avoid the duds which were fuelled up by operators, just go out and buy those bluechips. They will deliver, even if there is a global market meltdown for a while, and if you are a bit patient you will be rewarded. But do remember January 2008, as history will repeat itself again in the future. Just that our memories tend to be too short and our greed too much.

Courtesy: Udayan Mukharji