I believe the market is poised for a 5 to 10% correction currently. The near term major trigger for the market are Q4 March 2011 results of India Inc. Investors continue to scrutinize post-result management commentary to gauge outlook on earnings at a time when rising salaries, raw materials prices and interest rates are pressurizing profit margins of India Inc.
High global commodity prices will add to pressure on profit margins of Indian firms. The surge in crude prices shall also fuel concerns. The current account deficit continues to widen as crude retains itself at USD 108 a barrel. High crude prices leads to higher subsidy bills to keep inflation under check, leading to deterioration in the fiscal condition. State-run oil marketing companies can correct because of higher crude oil prices. Airline stocks can correct too on account of heighten worries about higher operating costs (higher fuel costs). The big boy Infosys has already reported disappointing numbers. IT companies could see margin contractions on account of a stronger currency.
The upcoming monetary policy review meet may see the RBI raising short term rates by 25 basis points causing interest rate worries. Auto stocks may correct owing to concerns about higher interest rates which could crimp sales of automobiles. Purchases of automobiles, including that of cars, two-wheelers, utility vehicles and commercial vehicles are substantially driven by financing. Bank shares can correct amid worries such as high inflation and rising interest rates that would hurt bottom line figures going forward. Realty stocks could also correct on worries of higher interest rates denting demand for residential and commercial property.
WPI rose 8.98% in March 2011, higher than 8.31% rise in February 2011 and also ahead of market expectation. US markets ended flat on Thursday amid concerns about faltering growth and rising inflation. A surprising jump in US jobless claims, raising some questions among investors about the health of the labor market recovery. The core US Producer Price Index rose faster than expected in March as fuel prices rose strongly, adding to concerns about inflation. Earnings could make for a bumpy ride in US stocks soon if more key companies undershoot expectations, possibly causing a spike in volatility. This could result to further inflows in the indian market, however, in my opinion, this would not happen. Valuations seem to be at the higher end of the price earnings. FII investors could look to invest in safer instruments such as bonds maybe, which may cause a spurt in bond prices.
Given all these variables, the margin of safety offered is low. The downside risks look higher than the upside potential. Also the market has been driven largely on account of large FII inflows. Any reversal in the trend could spark a sharp correction. Given the events taking place in the world, i do not see any reason to be optimistic, maybe cautious optimism maybe not. Ripe time for a correction in the markets, let valuations get readjusted in line with the economic reality, and then go cherry picking.
High global commodity prices will add to pressure on profit margins of Indian firms. The surge in crude prices shall also fuel concerns. The current account deficit continues to widen as crude retains itself at USD 108 a barrel. High crude prices leads to higher subsidy bills to keep inflation under check, leading to deterioration in the fiscal condition. State-run oil marketing companies can correct because of higher crude oil prices. Airline stocks can correct too on account of heighten worries about higher operating costs (higher fuel costs). The big boy Infosys has already reported disappointing numbers. IT companies could see margin contractions on account of a stronger currency.
The upcoming monetary policy review meet may see the RBI raising short term rates by 25 basis points causing interest rate worries. Auto stocks may correct owing to concerns about higher interest rates which could crimp sales of automobiles. Purchases of automobiles, including that of cars, two-wheelers, utility vehicles and commercial vehicles are substantially driven by financing. Bank shares can correct amid worries such as high inflation and rising interest rates that would hurt bottom line figures going forward. Realty stocks could also correct on worries of higher interest rates denting demand for residential and commercial property.
WPI rose 8.98% in March 2011, higher than 8.31% rise in February 2011 and also ahead of market expectation. US markets ended flat on Thursday amid concerns about faltering growth and rising inflation. A surprising jump in US jobless claims, raising some questions among investors about the health of the labor market recovery. The core US Producer Price Index rose faster than expected in March as fuel prices rose strongly, adding to concerns about inflation. Earnings could make for a bumpy ride in US stocks soon if more key companies undershoot expectations, possibly causing a spike in volatility. This could result to further inflows in the indian market, however, in my opinion, this would not happen. Valuations seem to be at the higher end of the price earnings. FII investors could look to invest in safer instruments such as bonds maybe, which may cause a spurt in bond prices.
Given all these variables, the margin of safety offered is low. The downside risks look higher than the upside potential. Also the market has been driven largely on account of large FII inflows. Any reversal in the trend could spark a sharp correction. Given the events taking place in the world, i do not see any reason to be optimistic, maybe cautious optimism maybe not. Ripe time for a correction in the markets, let valuations get readjusted in line with the economic reality, and then go cherry picking.
