Markets haven't bottomed out

Most players see a short-term bounce, but feel liquidity crunch may engulf Asia.

The much-touted important psychological support level of 12,000 for the BSE Sensex has now become history. After opening roughly 200 points lower, the Sensex continued to slide and closed the day at 11,801.70, a decline of 724.62 points as compared to its previous close.

Most experts blame the ongoing global liquidity crunch, which is yet to unfold fully, for the decline in markets. These experts suggest that the liquidity crunch, which started from the US and extended to European markets, could engulf the Asian countries too.

So, what is the short-term outlook for Indian markets? Raamdeo Agarwal, Director & co-Founder, Motilal Oswal Securities, says that more people are likely to get out of the markets as compared to people coming to the market. This will lead to lack of enough buying coming at lower levels.

He, however, says, “As far as the Sensex is concerned, it seems we are near the bottom, considering that valuations are more reasonable and we have already lost about 50 per cent from the peak.” A few others though are a bit cautious and believe that there is some more downside left.

Says Amitabh Chakraborty, President (equity), Religare Securities, “a short term bounce is likely, as the US is in an oversold zone and a sharp relief rally is possible there, but we remain cautious. While a short term spike of 10 to 15 percent in the Sensex cannot be ruled out, we are seeing the market bottoming out at 9,000-10,000, given our Sensex earnings estimates of 10-12 per cent in FY2009 and historically the market had bottomed out at about 9-10x forward earnings.”

In this lacklustre situation, there is perhaps a ray of hope. Among fundamental changes that provide some comfort is the decline in crude oil prices, now hovering around $90 a barrel. Experts say if crude oil prices stabilise at these levels or lower, it will be a positive trigger leading to improving business conditions and lower inflation.

This will also encourage the RBI to lower interest rates and ease liquidity in the system. In fact, in a bid to ease liquidity, the RBI cut the CRR rate by 50 basis points. Sebi’s move to relax guidelines for P-Note (for FII investments) is also seen in positive light.

But despite these positive developments, some experts suggest that the markets may still remain volatile and will be guided by global events. Says Hitesh Agrawal, head of research, Angel Broking, “It must be noted that despite the slowly receding domestic concerns (falling crude oil prices and stability in inflation), it is the global factors that will decide the course of movement for the stock markets over the next few weeks. Nonetheless, in such a scenario of attractive valuations caused by the distress selling by FIIs, investors should keeping an eye on the emerging opportunities in sectors/stocks to build a good portfolio for the long-term.”

In short, the overall outlook still looks weak, but, with guarded optimism as domestic valuations have come down and a few factors (soft commodity prices) are suggesting that inflation worries should ease out over the medium-term.