Why did Markets fall by end of October 2009:

All major markets the world over fell like a set of bowling pins this week. India too was not spared, and in fact headed the list of losers. The BSE Sensex fell 5.4% during the week.

A host of reasons led this fall:
• Weakness in commodity prices,
• Poor results by some large companies,
• Skepticism about the liquidity driven rally,
• Fears about the stimulus packages being withdrawn,
• Rising inflation,
• Expectations of an impending exit by the government of its loose fiscal stimulus were some overshadowing factors,
• Above all, with F&O Expiry on 29th October, there was severe Long Unwinding resulting in serious fall

Markets in the rest of the world had a similar story to tell. Apart from India, Germany (down 5.7%), Brazil (down 5.4%), and France (down 5.3%) led the fall. The US ended the week lower by 2.6%, while China fell by 3.6%. Some disappointing results from large companies like PetroChina and National Australian Bank weighed down on Asian markets, further fueling concerns that markets may have gotten ahead of fundamentals and that stocks may have risen faster than the pace at which earnings will perhaps rise going forward

Though all Sectoral indices in India ended up in loss during the week, the BSE Realty index led this fall with a miserable 15.4% decline. Realty stocks were hit by the RBI’s decision to make loans to commercial property developers difficult. The RBI indicated in its mid-term monetary policy review note - "In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets." The RBI increased the provisioning requirement for advances to the commercial real estate sector from 0.4% to 1%. This is surely going to hit realty companies that are looking to borrow from the banks to fund their commercial real estate development plans. Hence all Real Estate stocks fell.

Next, Metal stocks took a major beating falling by 9.6% during the week, due to lower Q2 sales and fall in profits by 50%. The next was the BSE Banking index which fell 8.8%. The central bank's decision to raise SLR (statutory liquidity ratio) requirement to 25%, from 24% currently, has had its impact on all banking stocks. Going by the RBI's upward revision of target inflation by March 2010 end to 6.5%, from 5% earlier, it seems clear that the bank's next step will be towards higher interest rates.

Finally, as expected, telecom major Bharti announced its 2QFY10 numbers. The company's sales grew by 19% YoY during 1HFY10 and 16% YoY during 2QFY10. During the quarter, its average revenue per user (ARPU) declined by 24% YoY and by 9% QoQ. Further, average minutes of usage (MOU) declined by 15% YoY and 6% QoQ. On the brighter side, operating margins remained stable at around 40.7%. Also, net profits grew by 28% YoY during 1HFY10. This growth in bottomline was mainly on the back of a stable operating performance as also interest income. Though the results weren't all that bad, the markets don't seem to be all that happy as the stock saw another trashing post announcement of the results.

As if all the other negatives werenot enough, higher inflation numbers too spooked the markets towards the end of the week. Inflation stood at 1.51% for the week ended October 17, as compared to 1.21% in the previous week. This clearly vindicated the RBI’s concerns that inflation is rearing its head again, and that the economy must get ready for higher interest rates in the future.

For a liquidity driven market, which has doubled in matter of seven months, many investors though happy with the recovery, were practically uncomfortable with the kind of run up. Markets were waiting to fall. With the compounding effect of all the negative factors mentioned above, markets ultimately fell. Now many investors may wonder it has fallen too fast ( by the same way it had risen ).

Those investors who missed up the earlier rally (starting April 2009), the current fall could be a beautiful opportunity. To buy stocks cheap, negative news must be there. Hence donot run away along with the crowd. Make a sensible analysis of the prevailing situations and make prudent inestment decisions. At EASY Investments, we are always available to assist you in your Wealth Creation Process.