It has been four years since December 2007, when I started writing my blog. Today I complete 200 posts, this one has to be very special for my readers. It has been a roller coaster ride for the equity markets over the 4 year period since December 2007. The markets created history by scaling 21,000 levels on the Sensex on 11th January 2008, only to fallback to 8,160 levels on 9th March 2009, and again rising to 21,000 level on 5th November 2010 (Diwali day). Since then our markets have slipped into a bear phase which is now getting closer to its nadir.
Some of my readers/ critics have accused me of being too negative on the markets in the recent past. I know most of us who invest in equity markets are bulls at heart and would like the markets to move in one direction only. But, we must appreciate the theory of business cycles that reflects in the Gloom, Boom & Doom in the markets. The current phase of gloom has been reflected in my analysis of the markets in the recent past. The reasons for my negative view have been based on the under noted factors:
- Political factors: The non-governance under UPA II has led to a policy paralysis and the opposition is least interested in letting the Govt. function. The results are for all of us to see, the investment cycle has turned negative with the economy recording negative IIP numbers for October 2011. There seems to be no end to the impasse.
- Economic factors: Inflation has continued to be stubborn, leading to a record 13 rate hikes affected by RBI till November 2011,which has virtually broken the back of India Inc. The result of high interest rates is being reflected in the profitability of companies leading to successive downgrades in Sensex projections.
- External factors: The Euro zone crises has moved from bad to worse creating ripples across the equity markets world over. Money is moving out of risk assets. Depreciation of the Rupee is also causing a lot of hardship in terms of higher cost of imports, leading to widening of the already high fiscal deficit.
So much for the bad news, now for the good news. Let us indulge in 'Crystal gazing' for the year 2012. Our equity markets are ripe for a sharp correction soon, and thereafter will see a strong recovery. I shall not be surprised if the markets not only regain the lost ground but will most likely make new highs (surpassing 21,000 on sensex and 6,300 on Nifty) by December 2012. The markets are likely to make a panic bottom in the period from December 2011- January 2012. This analysis is based on the past trends. According to Fibonacci analysis a bear phase in Indian markets lasts between 13-15 months, and the bear phase is on since November 5, 2010. The markets are likely to make a panic bottom around 14300 on the Sensex (4300 on the Nifty).The worst case scenario could take the indices towards 13,000 and 3,900 respectively. Thereafter, we may witness a strong revival.
The reasons of the equity market revival in 2012 are analysed below:
- A Doom and gloom situation is followed by a Boom phase, as per the theory of business cycles.
- The Boom phase is preceded by low inflation and falling interest rate cycle. In all probability inflation will fall sharply due to high base effect and RBI will have no option but to reduce REPO rate on 24th January 2012. This will revive the investment cycle.
- FII's will return to the Indian markets as Indian Rupee starts strengthening from January 2012, it may move up to the levels of 47-48/ $ by March 2012.
- The political circus would play out in December 2011- January 2012, and the Govt. will return to business thereafter.
- At some point in time Euro Zone crises will prove to be a boon for emerging markets, money will flow into Indian equity markets also.
Dear investors, get ready for the Boom phase in Indian equity markets in the 2nd half of 2012. Start investing now as panic sets in the markets. And do send in your opinion/ comments.
