When the US catches cold the world sneezes? No more.
In an ironic twist, believe a few stock market experts, who advice caution now that the Sensex recorded its biggest single day gain and is at its historic high, the world seems to be cheering the 'expected' recession that the US might be on the threshold of.
The 30-share BSE Sensex notched its biggest gain of 653 points on September 19 on the back of a 50 basis point (100 basis points = 1 per cent) cut by the Federal Reserve Chairman Ben Bernanke.
What really rejoiced the markets was the unexpected 50 basis point rate cut. The market was only expecting a 25 basis point rate cut as most analysts believed that there was no 'reason' for the Fed Chairman to hike rates by 50 basis points.
This then begs a couple of question: What was the 'reason' for the Fed Chairman to cut rates by 50 basis points? Is he seeing something that others can't as of now (the beginning of a slowdown in the US)? And more importantly, should the Indian markets be as euphoric as they were yesterday?
Ambareesh Baliga, Vice President Karvy Stock Broking, has a few answers.
"I am actually worried about this 650-point jump in a single day. So much of euphoria is actually uncalled for. We should read between the lines.
A 50-basis point reduction when we were only expecting a 25-basis point cut is proof enough that there is trouble brewing in the US economy. This must have made Mr Bernanke take a drastic step of 50 basis point cut. Going ahead, this is bound to affect us also," he predicts.
With oil at USD 80 per barrel and an expected oil price hike the inflation is likely to be a problem once again. Though tamed as of now by suppressed oil prices by the government, inflation can really play a spoilsport, said a fund manager with a foreign broking house, on the condition of anonymity. The appreciating rupee is another cause for concern, he added.
His concerns are adequately reflected in the IT stocks in the Sensex like Infosys, Satyam, Wipro and TCS, which have not participated much I the current rally. According to some estimates every one per cent rise in the value of rupee against the dollar reduces the profitability of these IT companies by 30-50 basis points.
Of course, the top-notch IT companies are making efforts to contain the effects of rupee appreciation. "But this may not be enough to protect their margins," he said.
According to him, the Indian markets too seem a bit stretched on the higher side. The Sensex currently is trading at 22 times its 2006-07 earnings.
What's more the July figures for the infrastructure sector are not too encouraging either. Against a 10.3 per cent growth in July 2006, the infrastructure sector posted a growth of 6.3 per cent in July this year. This comes on the back of an overall drop in industrial production to 7.1 per cent in July, a nine-month low.
Reflects Baliga: "The other concern is the US rate cut will put pressure on the RBI to do so in India. And reduction of rates here may not necessarily mean higher credit growth. Also, there is a real concern about a slowdown happening in India. Plus, I don't think the political scenario has cleared up."
Investment adviser S P Tulsian differs a bit from this assessment though. "While there are no concerns on the economic front in the near future the political concerns are there. If the tiff between the Left parties and the Congress over the nuclear deal with the US gets revived then it can be a bit problematic for Indian markets," he warns.
CPI-M, general secretary, Prakash Karat, has asked the government to keep the nuclear deal on hold for a period of six months so that there can be a thorough discussion in Parliament over its merits and demerits.
Tulsian believes that the rate cut in the US will make the stocks there less attractive compared to the emerging markets and India. He believes that India can notch an 8.5-9 per cent GDP growth in 2007-08 and this will bring the foreign dollars here in search of growth.
"Of course, FII money will be looking out towards the emerging markets and India is bound to be on top of their minds."
Baliga, on the other hand, advises caution. He believes that the markets are moving ahead of its fundamentals and "it will be very difficult to sustain such an up move. In the medium to long-term though we are mildly bullish and I expect the Sensex to settle down at 16,500 levels in the next six months."
His words of wisdom for the retail investors: Investors who must have made decent 25-30 per cent returns in the past one month should take this opportunity to book profits making use of the current momentum. This is the time to cash out.
While the Sensex gained 13.35 per cent, the mid cap and the small cap index too gained 12.52 per cent and 13.61 per cent respectively.
Finally, Tulsian sums up the Sensex story thus: "While the 650-point jump does not worry me as of now, if the same trend continues for a few more days then probably it will be a risk level."
According to him the sectors that still look good are automobiles, capital goods, hotels, cement, steel and non-preferred sectors are IT (because if the appreciating rupee) and the sugar sector.
© 2026