Nifty Analysis – Crash or Correction?

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Worst fear of Investors has been realized. Global Economic landscape is changing for the good and amidst that one is witnessing a sell off in the Equities market. At one point in time, we were expecting sub 5000 levels to come. However, somewhere in Mid July, we reverted our stand to being Bullish in the markets. As of today, despite the correction, we continue to remain positive on the Indian market.

One question which is bothering everyone is whether this is a periodic correction or it is the beginning of something similar which happened in 2008. That is, a complete collapse in the market. In all likelihood, this seems like a periodic correction in the markets wherein one will witness volatility. The signs which precede a complete melt down of prices seem to be missing and hence one has to be careful before comparing 2011 with 2008.

Firstly, the sectors which usually drive the markets down; Infrastructure, Real Estate, Banking and Energy are already reeling under tremendous amount of pressure and have corrected significantly from highs of 2010. Even if these sectors have to correct more, the likelihood of these falling further diminishes with every fall. As of now, these sectors look attractive and if a major collapse has to come in the market, it has to come from the defensive sectors.

Secondly, Leverage, the key ingredient of a market collapse which has preceded nearly all the previous meltdowns is missing in this case. Market participants are very low on their positions and the problem associated with margin calls and position square ups cannot occur in such an environment. Markets in India have been lacking conviction since early 2011 and hence participants as it is were never overly bullish on the market. Bullishness and Bearishness leads to Greed and Fear and thereby lead to excessive position build ups. Some of the markets which were doing well have seen some sell off and capitulation precisely due to these reasons of their market doing well preceding to this correction.

Finally, the debt situation in U.S. and EU is eventually going to benefit countries with high growth potential. Every investment in the World can be classified as Value Investment and Growth Investment. BRICS, Korea, Thailand, Chile classify under Growth Investment criteria whereas U.S. and EU fall into Value Investment. As and when U.S. and EU start getting things into place, fund managers will be looking into them for Value Investments. Whereas in the mean time, since money has to generate returns, fund managers will have to divert the funds to Growth oriented economies. With Crude prices cooling of substantially and likely to cool further on U.S. & E.U. outlook, attractiveness of India will surely build with time.

In the near term markets can correct further (currently at 5080) and hence levels at this stage remain meaningless. On our front, we will be looking to trade individual stocks and the Nifty futures on the long side primarily. We certainly feel that over a period of 6-12 months, more money is likely to be made on the long side rather on the short side.