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Rapid Fire | The healthiest thing for the markets will be a consolidation

Rapid Fire | The healthiest thing for the markets will be a consolidation
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First Published: Fri, Jan 29 2010. 10 39 PM IST

 Close watch: Headquarters of China’s central bank. The markets were taken by surprise when China tightened monetary policy late last year. Loic Hofstedt / Reuters
Close watch: Headquarters of China’s central bank. The markets were taken by surprise when China tightened monetary policy late last year. Loic Hofstedt / Reuters
Updated: Fri, Jan 29 2010. 10 39 PM IST
Indian stocks have been slipping for the past seven trading sessions, tracking global markets that fell on fears of a double-dip recession in major economies. Mint spoke to Jyotivardhan Jaipuria, managing director and head of research at Bank of America-Merrill Lynch, to find what investors should look out for. Edited excerpts:
Close watch: Headquarters of China’s central bank. The markets were taken by surprise when China tightened monetary policy late last year. Loic Hofstedt / Reuters
Do you think we are at the start of a double-dip? How deep is the correction likely to be?
If we just step back a bit, last year (our) markets gave the best returns since 1991. And after such a strong rally, what we are seeing is a small technical correction where investors are locking in a bit of profit.
Let’s put this in context. We have a market which (has) more than doubled from the lows in March. To that extent, a 10% or 9% fall is not really anything to get concerned about.
I think that the healthiest thing we could get in the markets this year is not another year of solid returns, but a year where the markets consolidate. It will probably give you a small positive return.
But global markets are also falling…
There is a fair bit of coordination in markets across the globe. We saw a fair bit of that last year and in the year before that. This correction has nothing much to do with India, but got triggered by a global correction led by the dollar strengthening. The dollar weakening was a trade which people played through last year. Another reason was that China tightened monetary policy. That was something which came as a bit of a surprise to the market.
What cues should investors watch out for?
There will be India factors and there will be global factors. The most important thing which is going to drive emerging markets is the Fed (the US Federal Reserve) and what they are going to do with their monetary policy. Because I think the worry for investors would be once the Fed decides to tighten monetary policy. We think this is not really going to happen till 2011. From our point of view, we think the Fed is going to be benign and that is going to be good for markets globally. The other thing to watch for is, of course, China and how significantly they would want to tighten monetary policy and at what pace. So that’s something people would want to have a track on globally.
Within India, we will have the RBI (Reserve Bank of India) and their policy, and the Budget.
In that sense, (we are looking) at the exit policy from the stimulus package of last year. That’s a key factor.
I think the other thing to watch out for in India and in all other emerging markets is the supply of paper (or new share sales). The supply is going to be quite high. It probably will be 2-3% of market capitalization. That may keep the secondary markets in check.
Which is likely to spook the market more—interest rate hikes or the fiscal stimulus exit?
Again, these are short-term things. If we go back into history, markets do correct a bit when the first hikes happen, in India and across the world also. But after that markets actually rally. And they rally because the hike happens due to the economy doing well. So, markets start factoring in a great economy, and we have markets doing well right up to the fifth or sixth hike. That is something that investors should keep in mind.
This Q&A took place ahead of Friday’s RBI policy announcement.
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First Published: Fri, Jan 29 2010. 10 39 PM IST