2008: Outlook

Hi,
Writing up this time with outlook for 2008. Now I have not done this before nor can I say that I am qualified enough to give an outlook for a year, but just trying it for the first time from past years' experiences.

Global Factors:

* Subprime Crisis: We saw the sub-prime issue raise its head somewhere around in Sept this year and it resulted in almost 1000 point+ dent in our market in few days time. Certainly the issue is far from over and a crisis, especially in developed financial market of Europe and US can have some serious effects on EMs too. So this will one of the major factor affecting our markets.

* US Recession: Now we are hearing this for almost more than 6-8 months and a recession in US means a major concern for trade and industry the world over. Most Indian exports are to US and if the demand goes down there then the growth here can too be hampered.

* Fed Moves: For past several months Federal Reserve has been constantly cutting the interest rates to help the receding US economy. This may not be a permanent solution and once it becomes difficult to make any further cuts, things will get pretty bad.

* Dollar Depreciation: The direct effect of cut in Fed rates is the weakening of the US$ vis-a-vis other currencies. The strengthening of Rupee hurts the Indian exporters the most. Though the imports do get cheaper with dollar depreciation, but it seems that exports are favored more than imports and markets are more happy if Re stays at 41-42 levels.

* Crude Prices: Another impact of Dollar Depreciation is rise in crude oil prices. This year crude almost hit $100 per barrel mark. It seems that the way global factors are going it might go to much higher levels.

National Factors:

* Union Budget: This is of course the most important event which every one in the country is looking forward at. It is believed that since the UPA govt is nearing the end of its term, they are likely to be liberal. More "aam aadmi" friendly, as they like to call it. And if it is liberal then it will be loved by markets.

* Elections: This will be big. Just sometime around in Sept/ Oct or even Nov. it was believed that if Left pulls the support (over the Nuke deal) and early elections are called then Congress will emerge as winners with majority and would not need any alliance. This is what the exit polls also indicated. But after the recent Gujarat and Himachal election things look much different. The cloud of uncertainty is again looming over. And we have already seen in 03 what happens if no one gets a clear majority in elections.

* Unwinding of P-Notes: SEBI came up with the directive in Oct that all outstanding positions of P-notes should be settled within 18 months.(And the market had tanked more than 1700 points in first 2 minutes of trade). This means a lot of selling by the FIIs sub-accounts will be done. Though some sub-accounts have opted to register as FIIs but a lot of selling is yet to come.

* Nuclear Deal: Everyone knows how important it is for India. If this goes through it will really boost our economy.

* Short-sell by FIIs: SEBI recently announced that all class of investors will be allowed to short sell. The dates are yet to be announced. Now short sell by FIIs was allowed earlier but was banned for 6 years (after the Ketan Parekh scam). What are the effects of this are yet to be seen.

* Investments by Trusts: Since Trusts will be allowed to invest in the stock markets it will bring lots of funds in the markets. And we are talking about lakhs of crores of Rupees.

* Fundamentals v/s Valuations: Currently valuations looks stretched. Fundamentals do not justify the valuations. Majority of the stocks are trading at P/E of over 25-30x. This means that we have already discounted next 2 years growth figures. So, if during any quarters if the companies announce a less than expected PBT or PAT then major correction can take place in their prices. Also a poor guidance can dent the stock prices.

* GDP Forecast: The current growth rate may be stemmed. A double digit growth rate may not be achievable. We can hope for 8.3-8.7% GDP growth rate.

Conclusion:
It can be clearly seen the the negative factors outweigh the positive ones. In such a case I don't think that we will see the kind of gains we have seen in past 2-3 years i.e 30-40% gains on Sensex itself. But the growth could be just 20-25%. This translates to Sensex of 24000 odd or at most to 25K to 25500 from current 20000 levels.

The current trend of whole sector run-up may change and only few companies may participate in the rally instead of the whole sector buzzing.

For Medium Term things look bleak but no problem for long term at all. So, if one gets chances of short term trading gains of 25-30% then its worth taking those 'cause short term gains of 80-100-120% seems less likely this time.

But again, amid all the this, one will have great opportunities to buy stocks for long term and one should capitalize on them every time its possible.

Ok, now thats my analysis and it may be wrong too. Like they say 'stock market is a place where the wisest may prove wrong and where fools can also rule'. If you have any more points or find anything wrong or have a different view then do comment. Any views are most welcome. They will help me in the future.

--
Bye,
-Rahul.


IQ (Investment Quote):
"Stock Markets Are Like Women- Difficult To Predict, Impossible To Understand."