Where are the markets going?

After two extraordinary years of very high volatility and directional movement of the market, investors and traders are feeling challenged with this consolidation phase. Some amount of anxiety is natural as, from these levels, a sharp breakout or a breakdown is what the markets are expected to deliver.

What is the market likely to do from here?

In the short term, markets are likely to be the slave of international news flows and sentiments that will drive liquidity, determining direction. A slowing China, a soft commodity price outlook, a US where apocalypse has been averted but bad news flow is still likely to continue from employment and housing numbers, and a European union that is being put through a stress test are likely to keep the markets nervous in the immediate. In the short run, the Indian markets have largely run their course and are adequately priced at their current earnings level.

The nervousness in the currency market is likely to keep spilling over into the equity market, which still reacts more sharply to bad news than to good ones.

Foreign institutional investor (FII) flows of over $5 billion this year compares well to over $17.5 billion received in the entire last year and, as Taiwan and Korea may get bumped up into the developed category, the allocation to India in the MSCI emerging markets index is likely to increase. The fundamentals of India as a macro and that of India Inc have held gloriously well in the 2008 meltdown and the confidence of looking to India as a safer place to keep your money has increased, unlike the last time when the Sensex fell faster than the Dow.

If one takes a medium- to long-term view, India is in a very sweet spot: An eight per cent-plus GDP growth rate for the near foreseeable future, focus on infrastructure, growing domestic consumption, social sector schemes and higher support prices boosting rural demand and a likely decent monsoon — all augur well.

While Inflation is a challenge and is still not showing any sign of improvement, the fiscal situation is seen improving over the current and next year. With public debt-to-GDP ratio of 59.6 per cent, which compares favourably with what even developed economies are now grappling with, and given the growing tax revenues, India has a strong case of rating upside at the sovereign level.

If you have a long-term horizon, dips in the market should be used as good buying opportunities. We are overweight on stocks that are a play on domestic consumption, banking, pharma, print media, oil & gas, capital goods and power. We are underweight on commodity plays of steel, cement, realty and neutral on telecom and auto.

While market participants are disposed towards action, sometimes, the market rewards patience.

The author is MD & CEO, HDFC Securities