Political uncertainty, profit-taking may cap upside

The outcome of the crucial G-20 meet scheduled on 2 April 2009 will dictate near term trend in global stocks which has risen sharply in the past few days on hopes the worst of the global economic recession may be over. But political uncertainty ahead of parliamentary elections and results from India Inc for Q4 March 2009 and also the year ended March 2009 will ensure high volatility in Indian stocks.

Profit taking may cap near term upside in Indian stocks. The Sensex jumped 2,188.43 points or 26.81% to 10,348.83 on 2 April 2009 from a 3-year closing low of 8,160.40 on 9 March 2009.

There are slew of holidays for the market in the next few days. On Friday, 3 April 2009, the market remains closed on account of Ram Navmi. The market is closed on Tuesday, 7 April 2009 on account of Mahavir Jayanti and again on Friday, 10 April 2009 on account of Good Friday.

The G-20 meet in London is crucial as the leaders of the world's major economies will gather to find solutions to the global economic crisis. As per reports the G-20 countries which account for about 80% of the global economy may agree on regulation to all financial markets, instruments and institutions, including hedge funds. They are also expected to examine ways to get so-called toxic assets off banks' balance sheet where they are impeding lending to consumers and businesses.

The European Central Bank (ECB) on Thursday, 2 April 2009, cut its key interest rate to 1.25%, a fresh record low. Yet, it was a smaller-than-expected cut. Most economists had expected a half-point cut to 1%. The ECB had already cut its key rate five times from 4.25% in October 2008 to 1.5% in March 2009

Economists are now waiting to see if the ECB follows other central banks in moving towards quantitative easing. Both the Bank of England and the US Federal Reserve have introduced quantitative easing - whereby they increase the amount of money in the system - as they try to counter the economic downturn.

Also the US data on unemployment and non-farm payrolls due on Friday, 3 April 2009 will be closely watched. Economists expect 660,000 job losses in March 2009 to be revealed in the Bureau of Labor Statistics (BLS) report, against 6,51,000 jobs lost in February 2009, marking the fifth straight month of over half a million job losses.

The a report from the Organisation for Economic Co-Operation and Development's (OECD) on 31 March 2009 said the world economy will shrink at a far faster pace than originally expected this year. The OECD cut India's 2009 gross domestic product (GDP) forecast to 4.3% from the earlier 7.3% forecasted in November 2008.

Closer home, the focus would shift to Q4 and year ended March 2009 earnings.

The activity of foreign institutional investors (FII) will be closely watched. They were net sellers of a marginal Rs 1.10 crore in March 2009 compared with an outflow of Rs 2707 crore in February 2009 and Rs 4250.30 crore in January 2009. However FIIs still remain net sellers to the tune of Rs 6671.60 crore in calendar year 2009 as on 31 March 2009. They had pulled out a massive Rs 52998.70 crore in calendar year 2008 as against an inflow of a huge Rs 71486.50 crore in calendar year 2007.

Inflation as measured by the wholesale price index rose 0.31% in the 12 months to 21 March 2009, marginally above the previous week's annual rise of 0.27%, government data showed on 2 April 2009. The annual inflation rate was 7.85% during the corresponding week of the previous year.

The market is agog with expectations of rate cut by the Reserve Bank of India (RBI). A sharp fall in inflation has provided room for the RBI to cut interest rates further to support faltering economic growth. Marketmen are expecting at least a 50 basis-point cut in the repo and reverse repo rates. Repo rate is the rate at which RBI lends to commercial banks and reverse repo rate is the rate at which RBI accepts deposits from banks.

But the upside in Indian stocks will be capped due to political uncertainty with general election to be held in mid-April 2008 to mid-May 2009. More so at a time when it is highly unlikely that either Congress or BJP comes to power on its own i.e. without the support of other smaller/regional parties.

The market may recover if a coalition led either by Congress or BJP comes to power. But the recovery will be subject to BJP or Congress led coalition coming to power without a support from the Left front which is against key economic reforms. The market will then look for whether the new government which comes to power undertakes second generation reforms that could bring India back on a strong growth path witnessed in five years between 2003 and 2008.