No Santa on D-Street this December…will he return next?

It is interesting to note that public opinion normally calls for a correction in December as a large number of foreign institutional investors sell off before the festive period to book profits and go on a holiday around Christmas and New Year time. However,it is quite opposite which ultimately happens,making it a profitable month most of the time.

After the lows of 2009,Indian equity markets scaled new heights in 2010,peaking at 21,000 Sensex level in November last year. Looking at the India growth story,no one in 2010 imagined it to become one of the worst performing emerging markets in 2011. Equity markets in India have lost more than 23 per cent in 2011. Post global financial crisis in 2008,it never saw stability in the trading volumes. Inflation,policy inaction,falling rupee and volatile equity markets have left experts wondering how to trade in this market. But there’s a silver lining.

One of the worst periods

While Indian equity markets have seen several ups and downs in the past,this year is particularly tough,old timers say. The first time it experienced huge volatility was after Harshad Mehta scam was exposed in the early ‘90s. The Sensex zoomed past the level of 2000 to 4,000 from January to March 1992. However,after the scam hit the markets,there was a bout of heavy selling. It was only in the year 1999 that Sensex could cross the level of 5,000.

However,markets had a bad time again from the early 2000 to end of 2002 (nearly three years) after the dot-com bust in US in the year 2000 and terrorist attack on World Trade Centre in New York. US subprime crisis and the fall of Lehman Brothers was the start of rapid fall in the India equity markets spanning from the early 2008 to 2009 period which saw the Sensex crashing from the 21,000 levels in January,2008 to 8,700 level in October,2008. This was till then,one of the toughest periods most of the equity market analysts had seen in their lifetime.

“We faced lot of problems in terms of volatility in 2008. But currency,inflation,high interest rates and policy inaction were not the major hiccups then. Today we have several domestic issues,” says B Gopkumar,Head – Broking,Kotak Securities. This time around the pain is at a different level altogether which has domestic problems mixed with the grim international scenario. The fall is no more the moot point. Uncertainty is.

With the fear of some of the European countries defaulting on their debt obligations and downgrade of US sovereign debt,the chances of slowdown looms large on Indian economy. While last financial crisis was more US driven,this time around India has several of its own issues to deal with that are driving the markets to newer lows. “India growth story was taken too seriously this time. Those companies which have incurred costs banking on the growth story,are bound to suffer huge losses,” says Jaganatthan Thunuguntla,Head Equity,SMC Capitals.

Silver lining

“Uncertainty is part of life when you are into the equity markets. The present European sovereign debt crisis is not an exception though the features,impact and quantum of the crisis might be different,” says Alok Aggarwal of Bajaj Capital. The extreme volatility in the equity markets saw almost all the broad parameters of equity trading,which use several patterns and charts to predict the market,falling flat with analysts avoiding to take a firm call on what could be a “right trading strategy”.

Economic uncertainty and rising fear of slowdown saw investment managers to invest in the defensive sectors such as FMCG and pharma to reduce the portfolio risk. “Except stocks in the defensive sectors,everything is cheap currently. It is a good time for selective buying,” suggests S Naren,chief investment officer,ICICI Prudential AMC.

Most of the markets are of the view that positives,if any,would be visible only in the second half of next calendar year. They feel the assembly elections in Uttar Pradesh (UP) has played the spoilsport as government resorted to populism rather than focussing on the reform process and once it is over,the focus would shift back to growth. “Post UP elections the reform process should be back on track which can be a big positive for the market in the second half of the calendar year 2012,” says Ramanathan K,chief investment officer,ING Investment Management.

While equity as an asset class is difficult to predict or time,most of the experts,though divided on exact numbers,agree that there is money to be made in the next 12 months. What could be the biggest positive for the corporate India,reeling under the high interest rate scenario,is expectation of interest rates falling from the current levels.

“Over the next one year,markets can give returns of about 20 per cent based on the assumption that interest rates peak out,reforms will be taken up and global economy will not see any defaults or bankruptcies,” says Dipen Shah of Kotak Securities.

This means that if not this time,investors might be able to have Santa’s blessings in the form of good returns next December. However,that would require choosing the right stocks now,based on their valuations and businesses and not on the hearsay or speculation.

— ritukant.ojha@expressindia.com