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Friday, December 25, 2009

Road Ahead For Indian Stock Market

The index of industrial production (IIP) has clocked impressive growth in the past two months. In September, the index grew 9.1% compared with 6% in September 2008. In August, it had grown by 11%. Does this indicate good times ahead for Indian economy and so for Stock Market?

Road Ahead For Indian Stock MarketIndustrial production (IIP)
This surge in industrial production may look as good times ahead for the economy. The corporate sector and stock broking traders have the same view, but it is too early to celebrate because the sharp upturn in industrial growth is due to the low base effect. “The near zero base for IIP growth in the second half of 2008-9 makes the headline numbers look good but could be masking the lack of underlying momentum in industrial activity,” says a recent note from a UK-based research house Noble.

SENSEX EPS for 2010 - 2011
Stock market investment research team from Kotak Securities has reduced its estimates of the Sensex EPS for 2009-10 by 2.9% to Rs 913 and for 2010-11 by 2.8% to Rs 1,098 on the back of the cut in earnings of Reliance, ONGC and the telecom sector.

Inflation Blues
Inflation could bounce back with a vengeance. The drought has reduced this year’s kharif crop production by almost 18% compared with last year, forcing a sharp rise in food prices. Headline inflation could hit 6.5-7% by March 2010.

Interest Rate Hike
RBI has already started tightening the screws and there is talk of the stimulus package being rolled back. There could be a hike in the cash reserve ratio in January 2010, followed by hikes in other policy rates in April, resulting in a rise in interest rates.

What to do?
What does this mean for common stock market investor? Kotak Securities feels the market is fairly priced and there is limited scope for an upward revision in EPS estimates. It is wise to not rush to buy stocks, being cautious and patience would pay off in longer run.

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