The last week ended on a positive note, where after four-and-a-half months we saw FII inflows of $600 million. While this may be a reason to cheer, one needs to see if the fundamentals have changed.
I think a cloud of uncertainty still lingers. Surely, in the recent past, the markets have withstood most of the negative news with resilience and there was a consensus, which is why the small inflows have led to such a sharp short covering. As we look ahead, the next few months still look challenging with an uncertain political and economic environment.
I think taking a view on the market is similar to taking a view on oil. If the crude oil prices come down or the markets build an expectation of it coming down, then the market will start cheering, as worries over inflation and interest rates will start receding. At this point, I do not have a strong view point on crude oil, as it is event driven. Though I think it should settle somewhere between $80 and $90 a barrel in the long term. Any short-term spike in the crude oil prices could definitely lead to a sharp correction in the markets.
Structurally speaking, I would like to watch some positive developments that would make me change my view towards markets. It is most likely that the markets would have gone up by another 8-10 per cent by then, but this will give a better sense of the long-term growth story. Among these key indicators are:
(a) Investment activity to pick up in the economy: Some of the structural reforms, announcement of new capital expenditure plans, order book situation could be a good indicator.
(b) Liquidity to ease out: Some amount of ease in liquidity can lead to short-term interest rates to come down, which will also reduce the cost of capital for working capital and investment.
(c) Pick up in manufacturing exports: If manufacturing exports pick up, it will be a very good sign and capital flow dependency will reduce and rupee will hold stronger. Stronger rupee can attract further flows in an otherwise globally weak currency scenario. However, it is not very clear if the market is making any of the above hypothesis while it is rallying or it is just a short covering. I am currently in the second camp, but carefully evaluating my view and on a look out for data and clues.
The author is EVP and head, institutional equities, Edelweiss Securities
