Stock markets have not been in the best of health over the last few months. The peak of the market was made on Diwali Muhurat day, the 5^th of November 2010 when the BSESENSEX made a high of 21,108.64 and the NSENIFTY a high of 6,338.50 points. Since that day the SENSEX has lost 3,813.02 points or 18.06% to make an intraweek low of 17,295.62 points. The NIFTY has lost 1,160.80 points or 18.31% and made an intraweek low of 5177.7 points. The markets have closed at 17,728.61 for the SENSEX and 5,310 for the NIFTY. Though it may appear that in the immediate short term the markets may have bottomed out we are not yet out of the woods.

What factors have changed the market scenario completely is a question that comes to mind. The single largest factor driving our markets last year was the strong capital inflows where the Foreign Institutional investors poured in excess of $ 29 billion. This year the net sales in the first 40 days of the year have been in excess of $1.5 billion. The second factor has been the continued rising inflation which so far has not come under control and is unlikely to happen any time soon. In such a scenario there is cost push on account of rising interest rates and also the commodity prices which seem to be moving up almost continuously. The crude oil price rise was yet another factor which has made the condition of our market what it is today.

As if all this was not enough the political situation has added to our misery. Scam a day and the size and magnitude of something which has never happened before are rocking our country almost every other day. Gone are the days when the Bofor’s scam of a mere 64 crs cost the government of the day its seat. Today such amounts are not even considered as scams and the present 2G scam is of an amount in excess of 1 lakh crs or over 1500 times the size of Bofor’s. There are too many names involved and with Parliament slated to open in a week’s time things could liven up as we go forward.

An interesting development has started taking place these days in the market place. When share prices of a particular company get hammered, their promoters announce a buyback of shares from the open market. Though as a temporary measure the share price could stop falling and does rise in the immediate short term, it does nothing more than that unless the issue is resolved. In recent times we saw India Infoline doing this and last week we saw a similar announcement from Reliance Infra doing the same. Similarly the same has been done by Allied Digital which saw its share price crash to less than half in a single week. The share did rally on Friday and it would be interesting to see what happens the next week.

The issue in Allied Digital is about the Income Tax raid and the failure of the management to explain the event to its key investor which brought about this state of affair. In the case of Reliance Infra it is the market perception of the involvement of the group in the 2G scam and in the case of India Infoline it was post the Money Matters bribery scandal. It is often said that public memory is short, but in a market as volatile and vulnerable as ours is currently, bad news is dealt with brutally. The share price just crashes and it falls as if there is no tomorrow.

Is there hope going forward?

Yes there is hope going forward but optimism is some time away. The markets need to consolidate and time is the best healer of wounds. We need time, we need parliament to function, we need the JPC to investigate the 2G scam and bring the loot home this time. The stake involved is too high and we just cannot allow our politicians and our bureaucrats to simply get away by being dropped or dismissed. The budget should address the issues of black money and punishing those who have stashed away billions in secret accounts, at the same time also provide money for infrastructure development and more importantly address our fiscal deficit. With a very hostile, upbeat and united opposition this time around the government and in particular the Finance Minister has a tough time in presenting a budget which meets people’s expectations and in particular the market. The good thing however is that the market cooling of 18% has brought the valuations to become more realistic and offer some value buying in the current market place.

What should investors do?

I believe some amount of fresh buying for the short to medium term with strict stop losses and looking to make a small 10-15% from present levels would be in order. It would not make sense to expect a huge upside from current levels as the markets are likely to remain fairly volatile and nervous for some time. It would be in the fitness of things not to invest all surplus funds in the market at one time as plenty of opportunities would be available as we go forward.

In conclusion though there would be turbulent times ahead but plenty of opportunities for the patient and disciplined investor would be available. Be patient and disciplined to make decent returns.