All has not been well for Dalal Street in July, but operators had the compulsion to prop it up. Last week they went underground. The smart investors, who were short, managed to save their skin.
An initial dip and increase in volatility are on the cards this week. The short-term reasonably expected scenario is rise in activity – both selling and short covering. Traders will attempt to fish in troubled waters. The deep-pocketed and brave-hearted may tend to short certain counters in the “growth sensitive” sectors such as banks, autos, hotels and infrastructure.
Chances of benchmark index dipping to 16,000-mark in the short-term have brightened.
Equities as an asset class and emerging market stocks will likely have to wait a while before a new equilibrium in the global financial market comes in.
For the US market, beginning of the dark tunnel may have been signalled, but it is in no way the end-game for the biggest borrower of the world.
Fitch and Moody's still maintain their top rating for US debt. The S&P's downgrade of the US debt rating-triggered convulsion is unlikely to prompt a sudden sell-off of the US treasury instruments immediately.
But a gradual rise in borrowing costs for the US Federal and State governments, companies and consumers has been flagged off. S&P had announced a couple of weeks ago that it would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA' rated US federal home loan banks, and the ‘AAA' rated farm credit system banks to correspond with the US sovereign rating; it would also lower the ratings on ‘AAA' rated US insurance groups, according to its set criteria that correlates insurers' and sovereigns' ratings.
It is not just the US and European finances that are in bad shape , emerging markets like India also are. This is not news to investors and traders.
Pimco, the world's largest bond fund, had stepped away from the US government debt back in March. Global investors had positioned them safely in shorts on local equity street. The current withdrawals by the short-term overseas investors are not really a measure of long-term valuation indicator for the Indian equities' indices.
Some analysts, early this year, had pointed out that recent history showed that Sensex forward P/E went below 15x in exceptional circumstances, such as the dotcom bust or the Lehman-led meltdown.
Now if the developed markets are heading downhill into a new leg of the credit crisis, Sensex may not avoid a deep correction.
Ambit Capital research team said the silver lining now is that oil prices have fallen by almost 10 per cent over the past fortnight. It sees it as good news for the Sensex in the long run because of the reduction in inflationary and fiscal pressures that it entails. But in the short run it might not be good for the local market. “It appears unlikely that in the short term global investors will celebrate the events of the past week by buying Indian shares,” it noted.