Equity markets in India are scaling higher and have recently hit their all-time high. In October, S&P BSE Sensex, a frontline stock index, closed above 21,000-mark after 3 long years. On November 05, 2010 the index had closed at 21,004. Thereafter Indian equity markets had hit a rough patch and entered a corrective phase. Now they have fully recovered. But what is missing from the market is bullish sentiment of domestic investors. PersonalFN brings to you analysis of macro-economic indicators that broadly affect the market movement and shares with you its views on the future market course.

Which way markets are headed?

NAV Data: November 05, 2013
(Source ACE MF, PersonalFN Research)

If we compare market movement from the previous peak to the peak recently recorded on the index, there have been significant variations in the macro-economic indicators. Although a few indicators have substantially improved; others have worsened quite a lot.

Indicator	2010-11	2013-14 *
Inflation	9.52	5.49
IIP	8.21	0.60
GDP	8.50	4.40
Current Account Deficit	2.60	4.90
Rupee	45.40	59.44

* Figures are as per the latest available data averaged for the current financial year-to date.
(Source MOSPI, ACE MF, RBI and PersonalFN Research)

As given in the table above, inflation is the only factor that has improved over last 3 years, excluding which; all other major economic indicators have slumped further. Growth in Gross Domestic Product (GDP) has reduced almost to half. Industrial growth has been even worse at below 1% mark. Widening current account deficit has pushed rupee far below the levels witnessed in the Financial Year (FY) 2010-11. Moreover, inflation measured by the movement of Wholesale Price Index (WPI) has come down mainly because of lower industrial inflation. Retail inflation is still high. Expensive food articles are pushing the retail inflation higher.

PersonalFN is of the view that although the stock market is a leading indicator of the economy; it may not always depict trends precisely since markets are driven by sentiments over short run. They go up or down on the expectation that macro-economic situation would improve or deteriorate. PersonalFN believes, at present, investors are aggressively investing hoping that economy may only improve hereon and we have left the worst behind. Foreigners have been pouring money in Indian equities over last month or so. Foreign Institutional Investors (FIIs) have invested about Rs 15, 700 crore in October alone. This is approximately the half of net inflows witnessed in the current fiscal. This suggests that the current market movement is primarily on account of improved liquidity in the markets facilitated by heavy inflows of foreign capital. As mentioned earlier, in theory, there is always a possibility that the economy may catch-up with markets later. But PersonalFN believes this is unlikely under current circumstances.

India has been struggling to revive growth. Sticky inflation and higher interest rates have been making it difficult for corporate to grow their revenues and improve profitability. However, agricultural growth which is expected to be very high this season may provide fillip to growth.

Another trend that can be observed in the current market rally is; the rally has been stock and sector specific. Infrastructure story which was once considered a sure shot "money making idea" has turned out to be a damp squib. Manufacturing companies are struggling and it is evident from the sharp deceleration in industrial production. PersonalFN believes that investors should follow cautious approach and shouldn’t get carried away with blissful market sentiment. Now that Federal Reserves (in the U.S.) has decided to continue with its bond buying programme to provide monetary stimulus to weaker economy in the U.S.; money may continue to flow to emerging markets. India too would benefit from such easy liquidity conditions. But one shouldn’t forget that any liquidity driven rally ends with sharp declines if underlying fundamentals fail to catch-up. India is approaching Lok Sabha elections and its outcome may alone make markets jittery if hung parliament condition surfaces. Investors should take this opportunity to rather do some portfolio rebalancing. You should always follow your personalised asset allocation than following the market levels.

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