Markets have their own way of surprising investors, They fall when least expected to. They rise when we think the justification is limited. The idiosyncratic rhythm of the stock market is the only thing that is constant about it and investors need to understand how to use it to their advantage. Investors waited for the whole of 2010 for the elusive correction in the domestic stock markets. The correction that eluded investors in 2010 is coming to town suddenly in January 2011. Expectations of a recovery in the US economy, return of investor confidence in US markets and higher valuations in emerging markets are the reasons bandied around for the changed Indian market outlook. Inflation delivered the final blow and markets got the jitters leading to a sharp drop in valuations. FII’s turned persistent sellers in January 2011.
Investors who waited for all of 2010 to buy the dip are clamming up now with the sudden change in sentiment. Investors believe that rising inflation will erode corporate profits, raise finance costs as interest rates rise, lower consumption, and drag stock valuations down. The valuations do not always move exactly in sync with the actual changes in the business fundamentals. Mostly, the drop in valuations is overdone and investors shunning stocks leads to several good bargains getting thrown up. I believe that bargains will only increase in the days ahead.
written by Shyam Sekhar, ideator and founder, ithought.