Several events, both globally and domestically caused a severe fall in the markets this month. Nifty is down 8% this month and weakness seems to persist. I will try and address each issue separately.
Excess liquidity available across the world has started several governments to get concerned over inflation. With the Chinese government also seemingly getting worried and starting to tighten money supply, markets across the world took a beating. Chinese markets were down over 8% yesterday. US markets were down 3.3% in one day – worst since the terrorist attacks over 5 years back. Indian government has been coming out with a series of measures to clamp down inflation and the markets have been correcting. Controlling inflation is a difficult task. On one side, the government needs to slow down growth, on the other hand measures taken should not have a long term effect on growth.
Budget and Government
The finance minister presented the budget for the year. Overall GDP growth at 9.2% continues to be very strong. Markets fell over the past 10 days with worries over capital gains tax, service tax, STT, etc – the budget broadly left all these untouched, but increased effective corporate tax rates a bit, along with some increase in dividend distribution tax. But the underlying message from the budget statement is very clear – increased investment towards a more broad based economic growth, rather than focused on pockets oriented only towards the urban economy. Tax rates will also be maintained to fund this investment. There was a bit of concern with the Congress losing in some state elections throwing up concern over the recent economic growth having actually penetrated down to the rural areas.
Observations on the market
The Nifty is up about 10% since 1st April 06, despite the 8% fall this month. Interestingly, over 50% of the stocks in Indices like the Nifty, CNX 100 have delivered negative returns. More than 2/3rd of the stocks have underperformed the Indices. Apart from good performance from the mobile phone operators, most other sectors have been performing poorly. Stocks like HLL, which have been among the worst performers in the NIFTY, is down 35%. It seems that several sectors are available at attractive valuation and are trading near the low end of their valuation range. Over the last few days, steep falls were witnessed in highly valued sectors like Real Estate, Cement, etc. We are starting to see value among the large caps after quite a few months.