Correction in Indian stock markets - Have we reached bottom yet?

On 11Th January 2011, I had written in my article “Stock market India : correcting now, what's next?", about further correction in Indian stock markets. SENSEX was at 19,196 that time, I had mentioned 18,500 to 18000 levels for correction. We are at 18396 today, have we reached the bottom yet?

As far as SENSEX earnings levels goes, right now, at 18,396 we are near to the 16 multiple of earnings which is a norm of good levels for stock markets. So does that mean we are done with correction and we should start buying stocks now? NO! Let’s look at some of the important factors in 2011 before you rush for investing in stocks and mutual funds at these levels.

As I had talked about American stock markets in above mentioned article, American companies are reviving from recession slowly and they are expected to show good if not superb financial numbers in 2011. For FII’s who have been investing heavily in Indian stock markets, this could be a better opportunity to find some gains at home, and they are going there. So when FII money goes out of Indian stock markets, Indian stocks are not going to fly on their own or on only domestic money. Overall macro economics are still not good in Europe and US. America and China are fighting silent currency wars. Definitely not a good sign.

We are very close to our budget session. UPA government is already facing heat on account of many scams, political events and corruption charges. Opposition is using every opportunity to make government unstable. And UPA itself is not performing well at all. Inflation control, corruption, political unrest, UPA government has failed in every area. I just read a news that a consortium of biggest corporate honchos have written a letter to government about bad governance they are experiencing. UPA government doesn’t looks like in place to get the finance bill passed which could be a big unrest for stock markets too.

Inflation. Everyone, from pan wala, rikshawala to big corporate are talking (crying?) about rising rates of commodities and food. How is government going to control this? It seems they do not have any answer, at least as of now! It will be interesting to see budget and provisions government makes to tackle inflation. Interest rates are rising and they are going to only rise for some time.

Crude oil is going up, up and up. It is the only direction it knows as it seems. OPEC is of opinion that crude oil at even $120 is reasonable. Right now it’s in 90’s. Oil prices are going to only increase in future pressurizing again transportation, inflation and so commodities.

Although stock markets at these levels look reasonable, they look like they have already factored in the growth numbers for this and next year. So stocks are definitely not cheap at these levels. It is quite possible that we might witness further correction in next few weeks/months before market reaches reasonable valuations. One may start to buy stocks in small quantities at every dip for long term investment horizon form hereon. Start making your list of stocks to buy and be ready!