September 13, 2010

guest talk: rise and rise of SENSEX*

Sensex is not giving any signs of correcting. In the last… it has jumped from to over 18000. This has enthused bulls into forecasting that it will soon reach 25000. It will one day, but soon?
Let us just list the main reasons why the sensex must correct sooner than many forecasts to more reasonable levels, in conformity with corporate earning, and domestic and global economic expectations.

Inflation has not come down with all the steps taken so far. So, inflation is a big worry for the government: RBI is likely to take some tough decision in its next policy review.

Growth is OK, but the core growth is not that great. Moreover, growth figures often gets spruced up falsely due to base effect as last year was a depressing year. If tough monetary decisions are taken, growth will be impacted further.

Infrastructure is as poor as ever, and government is showing no great commitment to support it in a big way. There are massive slippages in all major physical and financial plan targets.
Policy scenario is not very enthusiastic. See the way the government treated Reliance over D6 oil and is now handling Cairn-Vedanta deal. There is a threat dished out to captive coal mines. Environmental and local issues and land politics are weighing heavy on natural resource based industries. Outsourcing ban in the US might prompt the stressed European economies also to do the same and it will hurt IT and services sectors badly. For no good reason, the government has cancelled L&T shipping foray. The feelers are that the domestic private sector’s role in nuclear energy will be kept low. Many more such examples show government’s unclear policy stand and confusion, and also unfavourable environment for industries.

Internationally, US and European economies are strutting along with government support and the green shoots are few and far away. Governments and private sector have become very cautious and risk-averse.

A lot of foreign money is flowing into India, and this is not always a good thing. Most of this inflow is hot money on which you cannot depend for economic growth. Highly suspect also for volatility in stock markets.

So, at macro level, we do not see reason to rejoice too much. Investors need to be cautious and reduce their investments whenever their specific stocks seem to be fully priced. The market will sure give an opportunity to invest at lower rates in very near future.

*: by friend K. Kaura, an investor who has made good money on the bourses.

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