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Paul Noronha

Fifty-Fifty: Despite stock prices showing some kind of stability last week, investors are still vary of sharp recovery in market and remain in cautious mood. -

The Dalal Street indices quarter-on-quarter have shed much more value than warranted by the drop in the reported corporate earnings.

The current valuation levels appear to put the second half earnings in the red. The forward earnings for financial 2009 are also being factored in with a jaundiced eye.

The excessive discounts mainly owe to the cloud of uncertainty of a bear market, which is causing restricted liquidity and reduction in risk appetite.

The monetary measures in recent weeks have just about been enough to raise the psychological comfort level to arrest the steep fall in the earlier weeks. But as business cycle is taking a downward turn, there would be a time lag before the market fairly aligns itself with it.

Consumption, input and interest costs and limits of tightening belt are changing. Corporate India, till recently on an expansion mode, is bracing for a serious adjustment spanning six to 18 months.

This will determine calibrated market response. Increasing fiscal deficits and the general elections (as early as in February next?) are likely to complicate the equity-asset valuation processes.

In this situation, the short-term outlook is likely to remain broadly bound by a range for the key indices and stock-specific movements depend on news flows. FII selling pressure is showing signs of tapering off.

Last week saw equity buying by a long-only Singapore Government fund and a Norwegian sovereign fund worth $400 million.

Some easing of tightness in liquidity, weakening dollars and crude oil globally are likely to lend psychological support for the local market this week.

Tendency to sell on rise or staying away, however, is likely to temper the mood. Cautious use of buying opportunities may keep the market scoreboard ticking at the same time.

If the market is able to maintain stability for the first few days, overall liquidity may also improve.

The recent carnage has left retail, HNI and corporate investors wary of mutual funds. Brokerages and investment advisors are trying to fill the void with fresh equity investment and trading strategies in a changing scenario.

Prescription vary widely – from a radical suggestion of “trade, do not invest” to conventional bottom fishing by identifying safe bets and potential outperformers.

Based on technical views, the “trade only” strategy further advises not to average existing holdings, to use further upside of 10-20 per cent to trade long with strict stop loss, and to aggressively reduce holdings or to create short at higher levels.

The stock picking advisors seem to favour telecom, PSU banks and mid-size FMCG counters. Strict no-no is placed for real estate, commodity stocks, capital goods, brokerages and NBFCs.

(Responses may be sent to jayanta_mallick@thehindu.co.in)

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