The writing on the wall was pretty clear since the beginning of the year: Indian economy was showing signs of a paralysis: The govt. has resorted to a 'shock treatment' only now when the patient has been shifted to the ICU. The steep correction in stock markets witnessed recently is merely a reflection of the state of the economy. I have been consistently warning the followers of my blog to book profits in the markets at every rise. This is what I had advised in my blog post dated 28th April 2013: "The best investment strategy in such a scenario would be to sit on cash/ bank deposits, which can be profitably re-deployed once the downturn has played out. A real/ meaningful global recovery is still at least 2 quarters away. It may not be a bad idea to sell in the markets at current levels and go for a holiday in May 2013." I don't know how many of you went for a holiday, but I did sell around 30-35% of my portfolio and went off on a holiday to Kashmir in August (could not afford an overseas holiday with the depreciation in Rupee)
Indian economy is now staring at the grim prospects of being in the grip of 'Stagflation'. According to Wikipedia: 'Stagflation', a combination of stagnation and inflation, is a term used in economics to describe a situation where inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa. Although, CPI (Consumer Price Index) in India has been consistently perched above 9%, the official WPI (wholesale Price Index) for July 2013 has shot up to 5.79% from 4.86% in the previous month. On the other hand IIP (Index for Industrial Production) has turned negative for June 2013 (a negative growth of 2.2% on a YOY basis). Most economists now fear the GDP growth dipping below 5% for FY 13-14. Indian Rupee has turned extremely volatile, and extreme pessimism amongst FIIs coupled with operator driven hammering could push the Rupee towards the 70/$ level in the short term. However, the REER (Real Effective Exchange Rate) for the Rupee is around 60/$, and it would recover to these levels once the speculation in markets is played out.
I am of the firm opinion that Indian economy is not in the 'Pink of health' and the stock market as 'a barometer of the economy' would continuously drift lower till some positive offshoots of growth are witnessed. The broader range of the market has shifted lower and the Nifty is likely to trade in the range of 5000-5700 in the short term. Investors are advised to book substantial profits towards the upper end of this range, and wait for the downturn to play out. The markets have shown a rebound on Friday and may sustain an upward momentum in the short run, guided by the Rupee movement. A sustainable market bottom looks extremely below the current levels: The markets could finally bottom out anywhere between 4500-4800 on Nifty (Corresponding to Sensex levels of 15000-16000) in the next 3-6 months. The frontline stocks quoting at high PE multiples would bear the brunt of the carnage in the next downturn, as the mid-cap mayhem is almost complete. Investors are advised to book some profits (losses in some cases) and take a break from the markets at this juncture. A word of caution: Some of you may be tempted to shift funds from Equity to Gold, please avoid that temptation as gold prices internationally have crashed, it is only the depreciating Rupee and the increase in duty that is keeping gold prices high in India.
