For the first time today, I am beginning to feel a little concerned about the stock market crash of the past 1 month. I am generally an eternal optimist about equities. In my previous post, I hinted about how attractive, valuations have become in the Indian stock markets and how this could be a great investing opportunity for folks at large. My view was that a lot of the stock market carnage of the past month was due to negative sentiments triggered off by the S&P downgrade of the US. It was my belief that we could fast be approaching a stock market bottom around the 4,700 NIFTY levels as the effect of the negative sentiments would not last too long. Given that Greece was bailed out, the latest US job numbers along with the latest Indian IIP numbers, all suggested that the global economic fundamentals are intact. Infact, I was also a critic of the double dip theory.
However, today 2 leading global names that I respect came up with revised global GDP numbers. This has rattled me a little. Morgan Stanley has cut its global GDP forecast to 3.9% in 2011 and 3.8% in 2012, down from 4.2% and 4.5%, respectively. What is important to note here is that the original forecast was 4.2% in 2011 and it was further increasing to 4.5% in 2012(which meant next year would be better than this year). However, now the GDP number has not only been cut in 2011, the trend(GDP growth rate) is likely to further worsen in 2012(which means next year is likely to be even worse!!). Furthermore, even Goldman Sachs has cut its global GDP forecast for 2011 to 4.0% from 4.1%.
Now, I totally understand that Morgan and Goldman cannot be infallible. However, the most important thing that drives stock markets is what lies in store in the future. Even the thought that next year could be worse off than this year, is proving to be hard to digest. If this happens, we are all in trouble from a stock market perspective as there would be absolutely no respite in sight for the next 2 years. In such a scenario, there would be no holding back the NIFTY. It could potentially fall to 4,000 or even 3,500 levels. And what is more agonizing is that it could actually be a slow and steady fall, rubbing in the depression slowly and steadily. The rebound could also take several quarters. I shudder to even think along those lines. I will be more than happy if my current line of thinking gets proven wrong.
The issue with slowdowns is that sometimes they tend to breed a further slowdown, thereby delaying a speedy recovery. I was actually planning to take some large calls in equities in the next few weeks. However, an uneasiness seems to be setting in now. My advice at this point would be to adopt an SIP approach from here on. This will ensure that you could get into the market ‘slowly’ at these attractive levels thereby reducing large exposure if the market were to fall further. It will also enable you to get a good return on whatever capital is invested in case the markets recover from here on. However, whether markets decline or go up from here, I am beginning to get convinced that it will be a slow and sticky move from here, rather than a rapid breakout or breakdown. My range for the next couple of months is likely to be 4,700 to 5,200 on the NIFTY. So, there is time to wait and watch before greater clarity may emerge and large calls could be made.
Posts
