To state that predicting the short-term behaviour of the market is difficult would be a gross understatement. In fact, it would not be wrong to mention that giving a view on the near-term outlook is like 'playing cards blind-folded', you either go right or wrong and the probability for both the events is the same.
The market dynamics are changing every passing day. Global growth, China tightening, commodity prices, US bond yields as an indicator for global liquidity and the Euro zone events will continue to influence day-to-day market moves as well as its trend, as we have witnessed in recent weeks.
Besides, the Fed Chairman's recent framework for ending QE3 has unnerved markets and has led to large outflows from emerging markets, with India being no exception. This has further put pressure on the Indian rupee, and this depreciation of the local currency, has become another major headwind for our markets.
Besides the above-mentioned global factors, the FY14Q1 numbers will have a bearing on the short-term behaviour of the market. While revenue growth should remain modest, margins could expand leading to higher profits year-on-year, especially for the broader market.
With the monsoon session scheduled later this month, political news flow will also play its own role in influencing the sentiment. The government will attempt to pass legislation, especially the food security and land acquisition ones. At the same time, news will keep on flowing around fiscal consolidation, divestments, foreign direct investment, power sector reforms, fuel price hike and project clearances. On its part, the Opposition would clamour for a no-confidence motion and the market could experience some mild tremor.
As regards the Reserve Bank of India (RBI) policy later this month, after a long time, we are a witness nobody is hoping for any rate cut, courtesy the recent rupee depreciation. In fact, a small group of currency experts argue if the rupee suffers some more sharp dips, a rate hike or further punitive action is also possible. Personally, I rule out that possibility.
As regards fundamentals, while a lot has been done on the reforms front over the last nine months, the time is running out (state elections in November & December and general polls in mid-2014) and not much of capital is expected to flow in during the interim period. Consequently, this could defer the kick-starting of the investment cycle, an absolute need for the economy at the moment.
On the positive side, the monsoon has been good with not a single district in mainland India receiving deficient rainfall in June this year. However, as of now, I have not read a single piece in the media saying this nor a single broker note. Last year, when the monsoon was delayed or weak, we had analysts writing weekly reports to point out how bad the monsoon was and what deep trouble we are getting into.
So, what does this tell us about the crowd psychology and how behavioural finance is at work? That a large part of the crowd has been numbed by persistent bad news and is unwilling to notice good news. That a vast majority are resigned to the fate that no good can come of the market and India and therefore are underweight themselves or are bearishly positioned.
Basically, when people don't have skin in the game, their views will always remain opposite to their own personal positioning i.e. bias.
Conclusion: The short-term environment remains hazy and sharp dips in the market should be used to buy good quality stocks.
The author is principal and head - PCG, Nirmal Bang Securities Pvt Ltd.
