Fundamentals Are Catching Up

The pre-Diwali market rally had sparked a great sense of anticipation about the good times to come with the arrival of the new Samvat. Investors usually become euphoric even at the slightest hint of a change in sentiment which follows a set of news flows. But it is extremely important to remember that the fundamentals will always catch up with the markets within a reasonable time. It is therefore that much more important to tread cautiously when you see some irrational exuberance around you. Those who have not done so always have to pay a price in terms of value erosion.

The first trading week of the new Samvat would have certainly bought this vital lesson to many investors. Before jumping on to the ‘new highs’ bandwagon, it would have been good to pay heed to certain facts – like what had changed fundamentally. The obvious answer to the above is “No”. The CAD, the rupee, inflation and geopolitics – all of these are almost where it was a month ago. New projects are yet to take off in a big way. In circumstances like these, there was absolutely no reason why the markets should have scaled higher.

The markets have caught up with that reality and have been trading quite weak. There is no way they can move sustainably upwards, unless a clear all-round picture of a turnaround in the economic fortunes emerges. This can happen only if and when the bottlenecks to growth are cleared.

One of the biggest problems that the economy in general and the markets as a consequence have faced is that of government inaction or ‘policy paralysis’, as it is fashionably called. This critical problem had appeared to have come to an end, with the government clearing a whole lot of large, stalled projects over the past couple of months. Well, clearing a project is one thing and getting it off the ground quite another. There are many underlying factors, which even now, are not conclusively in favour of these projects getting off the ground. Higher interest rates is one of them, or rather the most important one. Over the past one week, all of this has taken the markets to the levels where they rightfully belong at this point.

DSIJ has been among the biggest proponents of taking measures necessary to ensure that the economy gets back on the growth path. For this, the most important factor as of now is to bring down the interest rates, which have been hurting corporate performance quite badly. Our cover story this time looks at how higher interest rates have been hurting certain sections of Corporate India rather badly. From the looks of it, it seems that we are getting into a spiral where interest rates are being hiked to rein in inflation – though that is barely happening. On the contrary, even after a series of rate cuts, inflation continues to rise and remain in an uncomfortable zone. Surely, it is time that the RBI cuts down the interest rates and fuels growth.

Fears of the US tapering its bond buying exercise have surfaced once again. The better-than-expected jobs data has once again brought that fear into focus, and the global markets are reacting to it. Even more important is the movement of the rupee over the past few days. The fresh round of depreciation over the past week or so has already brought a furrow on the market’s brow. The road ahead is quite uncertain unless some strong measures are taken to reinstate growth. Until that happens, play the market with caution.

As regards our regular recommendations, we have covered pharma major Granules India in our Choice Scrip section, while Torrent Power is the Low Priced Scrip we have discussed. The prospects for both these companies are looking bright. Invest in these counters in a staggered manner.