THE Indian stock market growth story turned terribly sour this week and stock market analysts fear worse is yet to come in the near term. They say an intermittent bearish phase looms ahead, with the Sensex falling to 14,200 and the Nifty to 4,100, though the two indices may eventually hold at around 14,500 and 4,450 or so respectively – abysmal compared to the December 2007 highs of above 19,000 and 6,000 points. For investors trapped in the bearing market for having entered at higher levels – drawn by the average 20 percent returns on mutual funds in recent bullish years and double or nearly triple that percentage on certain sectoral stocks – there's no choice but to sweat it out. The daring, though, should perhaps sell at the next spike, prudently evaluate the promising sectors, buy on a dip, sell again at the next spike, and keep repeating the nerve-wracking process until some satisfaction dawns over loss-recovery or perhaps even profit. Liquidity crunch The Indian market's plunge last Friday along with global markets was in strong reaction to a price of $138 for crude at a time of global investor panic over perceived recession in the United States and the global fallout from the subprime crisis. The ongoing global market crisis is primarily one of cash. The US has been fuelling the rest of the world in terms of ample liquidity but now with its current account deficit exceeding $800 billion per year (7 percent of GDP) and its budgetary deficits approaching the $500 billion mark, liquidity around the world is beginning to dry up, thereby raising interest rates everywhere. This situation of cash scarcity has triggered a higher degree of risk aversion by foreign institutional investors (FII's) – investment funds, hedge funds, insurance companies, pension funds, mutual funds, etc. As a result, FII's are increasingly fleeing emerging markets where they had placed their bets on low-return ratios initially but sizable profits in the long run. So far in June, India has lost more than $5 billion in FII flows year-to-date (YTD). The FII outflows are also due to expectations of the country's slowing economic growth, widening deficits, depreciating currency, and high inflation. To compound matters, the ruling government's recent election defeats in key states and its inability to strike the growth-inflation balance suggest political uncertainty ahead. Sensitive sectors For the stock market, this overall macroeconomic situation is likely to adversely affect interest-rate sensitive sectors like Automobiles, Real Estate, Banking, and other capex (capital intensive) sectors that are eating up hard-to-find cash. But sectors that are generating cash, like FMCG, Pharma, Healthcare, IT, Telecom and Industrials (though they have fallen quite a bit from their peaks) stand a chance of still remaining bullish. From a long-term perspective, however, analysts insist that the India growth story remains intact. So far, India's real economy has not shown a tendency to go the way of its stock market. At this point, only a turnaround in the global markets, which is in chaos over high oil prices, can set off an Indian market recovery. However, with winter approaching in the Western hemisphere and higher oil consumption ahead, that's unlikely this year. In other words, dig in for the long haul. Note: This analysis offers a broad overview, and readers are advised to check with certified experts before taking any investment decisions. __
