What can take the markets above its previous highs? This question is bothering even the die-hard bulls as they search for positive reinforcement. Earnings expansion must improve if markets must scale their previous highs. Given the weak growth, it is not going to be an easy climb for earnings. So, what can make a big impact? The market leadership looks weak now and the defensives like FMCG and private banks are flogged. They can’t go much higher. The leadership badly needs to get broad based and that is not going to come easy. Earnings will expand only if costs drop. Precisely why commodities hold the key to a market revival. We need a contraction in commodity prices. That will not happen swiftly and the excessive global liquidity will ensure that it takes a while.
As markets consolidate, so must your investment book.
The slowing economic growth essentially manifests in muted corporate performance. This results season may not offer any negative surprises as markets have already pricing in poor performance . Markets tend to price in bad news and often rise when the news is bad. The consolidation of markets always happens in the midst of the worst corporate performance. Global allocations of capital to emerging markets in general and India in specific should be closely watched. If flows ebb, the markets will start to tire. On the contrary, if the flows hold up, the markets could harden. The supply of paper from the disinvestment program will put the skids to any rally. In this scenario, investors must avoid buying for the short term and restrict their buying to long term picks which have decent business visibility for the next three years. Beaten down sectors may look attractive and investors must to commit the folly of buying them merely because they are going cheap. The accent should be on quality even among the beaten down sectors. Overall, caution is the watchword.
Review & reorganize now. Results will follow you.