Monday, May 13, 2013: The nifty and Sensex are at ~6100 and ~20000 levels. Markets have had a sharp run for the last 2 months on account of improving macroeconomics. Correction in commodity prices especially oil and gold have helped curtail the current account deficit (CAD). Improving current account deficit translates to a better overall economic environment when you take a top down approach. And that is reflected in the broad market.
The sharp upward move made by the NIFTY is accounted by the stellar performance of the oil and gas, pharmaceuticals, banking and FMCG stocks. However, one must not forget that the performance of the NIFTY is not a true reflection of the markets. It is a mere reflection of India’s top 50 companies by market capitalization. We keep hearing figures saying FII’s have invested XYZ amounts in the markets. The conclusions one can form are obvious when you see the statistics:
Warren Buffet has been quoted several times when he says: follow your own counsel, not the advice of others. Amidst this gung ho about liquidity and buying by FII’s, falling commodity prices, improvement in India’s macro economic scenario and great momentum, one is often tempted to jump on the band wagon.
However a look at the markets from a bottom up approach tells a different story. A single word that can be attributed to stock performance is earnings. What has changed on a macro level to affect earnings on a ground level?
The argument of a decreasing interest rate environment resulting in a lower interest payout thereby improving earnings does not hold ground. It’s a weak argument. It makes a difference in earnings, but not a sustainable one.
Policy logjam, corruption scandals continues to exist. The biggest worry is the political uncertainly that prevails. And an even greater worry is the leadership of these political parties. It’s a matter of time before this drama starts to unfold. The timing isn’t certain, but the certainty of the event occurring is. For those who have been investing, one need not mention the volatility associated with such events.
And if that didn’t get you thinking already, evaluate the risk return payoff from here on. Given the way Mr. Market can behave when volatility increases, at these levels, an investor should take a tactical call on the market -continue the battle or wait for the dust to settle.
As for myself, I am a prospect theory kind of a guy – loss aversion (refers to people’s tendency to strongly prefer avoiding losses to acquiring gains). I don’t feel compelled to buy at the moment even if it seems fashionable.