Does this remind you 2008 ?

If you have invested sizable sum post Diwali of 2010, you must be wondering if this is going to be repeat of 2008 ?

Worried? You Should be. But not as much as you were worried in 2008...

Well, there are many factors which resembles 2008. Crude is heading to cross $100; Commodities are full of vigor; Both this pushing up the Inflation; Real Estate is showing a lull for last 3 months... Interest Rates are going up... Recent IIP of 2.70% has put a scare...and all that.

True, but we have still not reached the economy of Excessives. In 2008, the biggest challenge to the world was a "deleveraging process". The overleveraged balance sheets of US Banks were in a slow process of deleveraging which pulled out money from many emerging markets. Additionally, there was a much more impactful fear of Sovereign Debt Crisis. These are the troubles of the sizes which can gulp economies together. And in 2011, we are not even closer to that.

Yes, for India, this may turn out to be a challenging year (or say first half) but for a longer term, it is much more promising then what we have seen during last 2 years.

If we focus of the near future, yes, it does look dismal. What are the odds against the market?

1. Food Inflation becoming a political agenda - can that shake and pull down the current govt? It may not alone, but with the wake of scams coming out from 2G scam and many others in making, has a potential to destabilze the govt. and hence the markets...

2. Insurance Flows during last quarter:
Every year Insurance buys substantial amount of equities during last quarter as the money coming in last quarter (due to tax benefits and the year end) is the highest. However, this money always came in through ULIP route, which has gone down post changes in the IRDA rules in September 2010. The ULIP sale has gone half during Q3 and if that continues in Q4, at least 16,000 Crores of potential equity investments would be halted, simply because the money has not been garnered.

3. International Worries:
North Korea Tensions and Sovereign Debt Crisis of PIGGS countries continue to put pressure on the upsides of Internatonal Markets. Additionally, the US Markets are not showing any signs of exhaustion. They are slowly going up in a narrow range. This indicates a much lower volatility, which has never sustained. So, we should see some unanticipated developments coming out from US which will again spoil the game.

4. Inflation Vs  Growth Concerns - what is important on RBI's agenda? Next RBI action on 24th January will make it clear. But looks like that Inflationary concerns are on RBI's top of the mind concern and hence rate hike is imminent. This will not give markets additional shock, as this has already been factored into. On the contrary, this will help market to stabilize.

Here is the explanation how: Currently, the markets are falling not because of anything wrong in the fundamentals. Markets are falling because of the Foreign ETF redemptions and due to heavy selling of FIIs during last 2 months. This can get accentuated if the rupee continues to fall, as this will trigger other FIIs also to sell to protect their Dollar Gains. But if the RBI raises the rates, it will allow rupee to appreciate, or least to protect the downside of Indian Rupee. This means that incremental FII money will not move out and that will help the market to restrict the fall.

So to my mind, RBI raising the rates is good and not bad for the market, especially where the markets have already factored in the evil effects of rate hike.

In nutshell, for next 3-6 months, odds are stalking against the market. From the top of 21,000 on 5th November, market has corrected 10% and closed at 18,860 yesterday. And timewise, we are back to September 2010 when the Sensex was at the same level. Generally, the markets fallen by more than 20% is considered to be in downward spiral. To negate that, for the vibrant growth market like ours, a 5-6% rise during next 1 month is a strong possibility. But instead of adding long position, one should be cutting down the long position during this rise.

So, yes, Market in coming days would test the patience of long term investors and will also create fear psychosis which will convince everyone that we are back to 2008 days. And that would be the time to be bold in putting your money to play... Will that be in April - May or June?
Lets See...