Mood of the Nation & Stock Market Movement

I have expressed and maintained a view that India is in the midst of one of the greatest bull phases ever, but the events of the past few weeks have sown the seeds of suspicion in the minds of investors about the sustainability of the 'India growth story'. This phenomenon can be studied with the help of 'Behavioural finance'. Although stock markets return to the mean in the long run, they can show wide fluctuations in the short term. The most objective index to assess the markets is ' Price earnings ratio' which has fluctuated between a high of 28 (during the 2007-08 bull run) to a low of 8-9 (during the crash of 2009). The mean PE ratio is in the range of 14-16, which the markets are currently reflecting. Hence it is safe to assume that the markets currently are reasonably priced. The PE ratio discounting has something to do with the 'Mood of the nation' that gets reflected in the positions taken by investors in the stock markets, leading to volatile movements in our markets in the short term. Let us analyse the factors affecting the mood of the nation currently:

• Functioning of the Govt.: A spate of scams unleashed during the past few months has been largely  responsible for the negative mood of the nation. The establishment of the JPC, to be announced shortly, may lead to a short term reprieve but the investigations of the JPC will keep the political situation on the boil for at least the next 6 months. Opposition will not miss any opportunity to embarrass the govt. as the JPC probe gets underway, leading to policy decisions being relegated to the back burner. During this period markets cannot be expected to show any big up move, which is consistent with the views of the market analysts.
• Union budget 2011: The markets this time have corrected by about 15% in the month preceding the budget and hence may witness a reasonable pre-buget rally, which seems to have started. But considering that the Govt. is faced with a tight situation and is left with a little choice to reduce duties and taxes, the budgetary announcements are more likely to dent the mood of the nation. If the budget is viewed negatively by the markets, the chances of which seem high, a good sell off in markets can be expected post budget. Top performing sectors of the last bull run i.e. Banking, automobiles, IT are not expected to get any sops in the budget.
• India's performance in World Cup: Cricket is a religion in India, and the early exit of the Indian team from the ongoing world cup is sure to bring a pall of gloom on the mood of the nation. Some of you  may wonder about the relationship between cricket and stock markets, but it is interestingly true that a negative result in cricket and that too in a world cup does effect the bullishness in the markets. The hype created around the prospects of India winning the Cup will be largely responsible for a big blow to the mood of the nation in the event of India crashing out early. Given that no host country has ever lifted the world cup till date does not auger well for India's chances. If astrologers are to be believed, India can at best advance to the semi-finals. The line up for the final could be England Vs Srilanka. Srilanka can be given an outside chance as, though being a co-host of the world cup, they would be playing the final at Mumbai which is not a home venue. Things may have been different for India if the final was played in Srilanka. We may see a temporary lull in the stock markets post India's exit. But as a true fan of Indian cricket team I would still pray for India winning the world cup!