The financial world has come 180 degrees from the euphoria of earlier this month and, after last week, investors are wondering what has gone wrong with the valuations all of a sudden.
The sell-off that was triggered on Indian bourses is gradually spreading to other countries and Friday’s sharp fall on the US bourses has ensured a weak opening for Asian stock exchanges today. The trouble began in India with the Securities and Exchange Board of India (Sebi) initiative to curb foreign funds inflows. Confusion rather than the actual recommendation on Participatory Notes (PNs) led to panic selling on the bourses.
However, a fall was overdue and Sebi’s note came as the perfect excuse. But what worries me more are external factors, such as surging crude oil prices and signs of trouble in US economy. I had raised this worry in this column last week, asking what would happen when oil hits $90 a barrel. It did last week and worries over oil have now taken over economic fundamentals, while talk of economic recession has resurfaced again.
The recessionary fears are not predominantly due to oil at this point of time. They are primarily due to the subprime mortgage crisis, which has started reflecting in the financial numbers of the US companies. The disappointing financial numbers of Citigroup Inc. and Bank of America Corp. highlight this. Moreover, a warning by Caterpillar Inc. that the US housing slump was infecting the wider economy triggered a sell-off on US bourses on Friday. Also, the analysis of corporate results of US companies shows that of the 131 quarterly results declared so far, over 25% have missed their profit forecast, nearly twice the level of missed forecasts last year during the same quarter. Both periods are not entirely comparable as the subprime crisis is new to this period. But, it does look like all is not well with the US economy.
This week, all eyes would be on numbers from frontline companies such as American Express Co., Merck & Co. Inc., AT&T Inc., DuPont, Boeing Co., and Microsoft Corp, for clues on the financial strength of US companies. Moreover, data related to US housing sales will be closely watched as existing and new home sales figures are scheduled for release on Wednesday and Thursday, respectively. This data might weigh on the Federal Reserve’s meeting scheduled for 30-31 October. Interestingly, short-term interest rates futures in the US showed 98% chance of a 25 basis point cut at the Fed’s October meeting.
Whether it will be good news for emerging markets again or whether the current weakness of the US dollar—and its likely weakening following a rate cut—impacts them negatively is yet to be ascertained. It is because of this that the euphoria over a likely cut in interest rates in the US may not build up like it did last time on 18 September.
So, clearly there are not many positive clues on the international front.
Back home, Sebi’s meeting over PNs and expiry of derivative contracts for October will keep the volatility high on bourses. The fall on the bourses is likely to extend early this week, as the outstanding derivative positions are still quite large. Since quarterly earnings are quite robust and, by and large, above estimates, bargain hunting may also start sometime later this week. But, as of now, the situation looks grim despite the fact that foreign funds remained net buyers to the tune of $31.2 million or about Rs125 crore on 18 October. Technically, the Sensex is likely to witness support at 17,219, 16,917 and 16,382 points. On the upside, the first resistance is likely to come at 17,882 points, and the next levels of resistance are placed at 18,346 and 18,509 points.
This week, one needs to exercise caution and plan the next move only once the market stabilizes. Technically, this week, Reliance Communications Ltd, Infosys Technologies Ltd and Bharat Electronics Ltd look good on charts. Reliance Communications at its last close of Rs730 has a potential to move up to Rs765 with a stop-loss of Rs684.
Infosys at its last close of Rs1,910 has a target of Rs1,984 with a stop-loss of Rs1,821, and Bharat Electronics at its last close of Rs1,768 has a target of Rs1,842 with a stop-loss of Rs1,680.
From last week’s recommendations, HDFC Bank Ltd hit its target of Rs1,474, touching a high of Rs1,525. IFCI Ltd almost met its target of Rs93, but IVRCL Infrastructure and Projects Ltd touched a high of Rs530 on Monday itself but missed its target of Rs542.
Vipul Verma is a New Delhi-based independent investment adviser. Your questions and comments are welcome at firstname.lastname@example.org