March ’09 may prove turning point for global markets

Month of February brought back indices back to October lows for most of the global markets with few exception notable China. Around these levels now Indian stock market is trading back at historically low level of valuation and buying should emerge. But we have yet to witness serious buying interest in our market. And there is valid macro as well as micro earning growth related reason for the same. We need to track these unfolding events to asses when current trading market will finally turn to trending zone.

Since Q3FY08 (Dec 2007), we have seen continuous downgrading of Sensex EPS estimate. Estimate for FY10 EPS has seen downward revision from levels of 1373 to 970. And till the time we witness these earning downward revisions coming to halt or sign of upward revision we can not base our market judgment in terms of valuation level hypothesis. Or in worst case scenario market need to come trading at levels where even the most pessimistic earning estimate makes case for strong value based buying.

At macro level the recession in developed economies coupled with financial sector mess remains point of worry. Although various economic data coming out of US suggests that we are not going to enter into 1930s like recession (US GDP has fallen by 30% during that period, but now consensus figure for the same this time is in the region of 10% - 15%). But going by the evidence of last one year credibility of these macro economic forecasts looks poor. And so we need to move along these events as they unfold. Biggest worry remains chances of large scale further banking sector default in Europe particularly eastern Europe. Coming G-20 meet on April 2nd in Britain has of particular interest to asses these threats. If G-20 decides to increase contribution to IMF and raises its war chest to cope with possible large scale defaults it will of relief to finance sector in general. Also perception of strong support institution may even mitigate the chances of damaging defaults globally. Another worry crippling market is wide spread negative perception about financial sector among general masses and politician. Financial sector in developed economies is primarily responsible for current economic mess but solution also lies within it. Strong economic stimulus announced over last few months will bring desired result only on the back of confident and strong financial sector. Need of the hour is to stand against wrong practices of the sector but not to demoralize it to the point that real economy suffering prolongs. And such voices from top administrators of the world will do a lot of good to the financial sector. These are also more important as policy interest rates are close to zero keeping monetary stimuli irrelevant.

And as the market momentum suggest now and also keeping the macro issue ahead in mind it appears that March 09 will be an important month for global market. Market will recover in V shape or U shape or W shape or L shape will be an interesting point to watch but the possible cusp/first cusp may get formed shortly.