Watch from the sidelines

Watch from the sidelines

The slide in share prices continues. India’s benchmark indices closed at two-year lows when trading ended on Monday, as the global financial crisis spread further in Europe.

The credit contraction and deleveraging in the global financial system has sucked liquidity out of our markets. There is no point complaining. Domestic investors rode the wave when billions of dollars splashed into India. They now stand exposed as the tide ebbs.

Is this the end of the selling? It is hard to tell. We feel the entire exercise of calling it a market bottom is of little interest right now. First, the analysts who are busy making these calls lost credibility long ago. Second, a bottom is not necessarily a signal to go out and buy stocks. It is quite possible that share prices may stay trapped in a trough for many years, so investors could be facing a long period of minimal capital gains. We should remember that share indices stayed in a tight range through most of the 10 years after the crash of 1992.

There are two things to watch out for in the weeks ahead. One, Indian companies will soon start announcing their financial results for the second quarter. The economy is slowing and financing costs have shot up. These will eat into profits, though the corporate advance taxes paid to the government suggest that the best companies are managing pretty well.

Two, Mint has earlier reported that domestic institutional investors—mutual funds and insurance companies—have been buying stocks despite heavy sales by foreign portfolio investors. That is one reason why India has been one of the best performing markets in the world in the past three months. It will be worth seeing whether small investors continue to buy mutual fund units and unit-linked insurance schemes or not. If they do not, their redemptions could lead to greater selling pressure.

Most economists believe that the next few years will be tough for the world economy. The long-term India growth story is still credible, though growth in economic activity will get affected by the global slowdown. However, the irrationally exuberant bull market of the past five years is well and truly over.

Should investors be content to stay on the sidelines for now? Write to us at