The ratings of Nations and banks are an indicator of their financial strength. In theory, these ratings indicate their soundness and stability. If the Rating agencies see deterioration in fundamentals, a downgrade should be effected. But downgrades of sovereigns seldom happen as swiftly as fundamentals change and often happen when they can no longer be deferred. The way rating agencies handled the US banks in 2008 raised serious questions on their efficacy and integrity. The downgrade of SBI by Moody’s caused another sell-off in SBI. Possibly, similar measures taken by Moody’s on several UK banks will create some panic. The fear of Nations defaulting which dominated sentiment over the past few weeks has got diluted and the worries have turned on the banks. It looks like a few weak banks probably will default. That will be dealt with systemically and locally rather than globally.
After Q2, the markets seem resigned to expecting lower corporate performances. The sales numbers of the auto industry show that except two-wheelers, the rest have little to cheer about. The market is expecting only bad news and seems prepared for a disappointing results season. FII’s have been selling relentlessly and this is largely due to their own redemption compulsions. Domestic fund buying seems to be in the nature of maintenance buying and will remain so. When low expectations get discounted into stock prices even before the results are formally announced, the worst news gets factored in. Once the result season ends, the markets may well begin to look ahead and begin to discount future performances and events. The FII’s could also surprise us by reversing their India strategy in the coming year. Overall, we are headed into an interesting period when investors know what to expect and learn to look beyond the obvious.