Tuesday, July 22, 2008

Market Mayhem - Politics or Policies?

With S&P CNX Nifty closing at 4159 today i.e. the pivot point of 4155 that I have been writing about all along, it is important to take note of it. It also marks one of the single closing bell above the 20 DMA after a period of almost a month. Does this mean we have a bottom at hand. I think it is far from over yet.

In the post investing cycles I mentioned that it is better to be in utilities rather than any other sector. We see a smart run in some of the utility stocks such as Power grid, NTPC and some sort of recovery in Tata Power. This are the sectors which would serve well over a period of time. Now I see that markets may be poised to move up the important pivot which can surely call for a much stronger bounce. The resistance level of 4280 is a very important resistance level. So 4300 should serve as a good level to sell into the strength. More importantly Nifty generally reverses on Tuesday or Thursday so we have to watch out for any signals. However this is just an observation and no rule.

Taking a look at the political angle that has been much talked about and analyzed. I see there has been a very important shift in the political scenario in the last one week. The stock market never likes uncertainty. In face of a no confidence motion and expected downfall of the government at the center I called for a significant bottom in the stock indices. Now this seem difficult. The dynamics that I look for to understand the market expectation is very simple. Market want a stable government. Indian politics is marred by coalition government which is the weakest form of government that India can afford to have. Previously with left withdrawing support, I expected the government to fall. This would have clearly raised the expectation of a right government at the center. But with Left, Right and BSP stitching up a poor blanket to topple the government, the markets would be frightened to see such a coalition where all the factions have different way to doing things.

Today the Indian PM was quite confident of sailing through this no confidence motion in his opening remarks. The markets actually took it as a sigh of relief that if this government stays for now, some hard decisions can be taken.

Well, right, left or centre, all the political factions have ignored the harsh realities of Indian economy. The total central plan spending on agricultural and allied activities, as a proportion of India’s gross domestic product (GDP), is projected to decline from 1.42% in 2007-08 to 1.30% in 2008-09. Currently India faces acute shortage of food which would take mammoth proportion in the years to come. Just read this very enlightening article on the plight of Indian agriculture -

According to the government of India’s Economic Survey, the rate of growth in India’s food production is 1.2% a year, significantly less than the population growth rate of 1.9%. The creation of additional irrigation potential in Indian agriculture was 3% a year in the 1990s. It has declined to 1.8% in 2007.

The point is that investors need a government which can focus on important fiscal measures which would be beneficial for long term solutions to long term problems. Monetary policy cannot act instantly in a country like India which has very low leverage in financial sector. The important problem to be addressed is not the growth slowdown but the inflationary expectations. Indian inflation scenario is not just due to demand pull, most part of it is cost push. So increasing rates would reduce demand but more important is to increase the production. We already know the production of each and every commodity consumed in India is either less than demand or is just at par. Sugar being an exception which would also not be one in few years time. The important measure right now is to curb the excesses by raising rates. But that will do little to cool off inflation and there is little incentive to slow growth as well. That means if money supply is reduced drastically there would be scarcity of business investment as well.

As for traders, strategy should be to sell on rise to 4215. Beyond 4215 Nifty, an important range would break and markets may go higher to 4450 levels and may at beat reach 4660 in few days. But remember we are in a downtrend, it always pays to sell at important pivots rather than buy. Markets trade in the direction of trend for a longer period of time than the countertrend moves.

It is the time that the market gets an answer for questions on important policies rather than speculating about an MP voting for lotus or otherwise.

Sahil Kapoor
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