Investors should lower return expectations from stock market

A lack of short-term triggers in the Indian stock market and concerns of an early increase in US interest rates saw 1,000 points getting wiped out of the Bombay Stock Exchange (BSE) Sensex. Though a correction in the market is healthy - it comes after a sharp 7,000-point rise since February - but the absence of a positive trigger is leading to the fading of interest in Indian market. In fact, forecasting a view on the equity market for the short term has become difficult.

First, because the equity market is not cheap, and second, volatility and uncertainty have gone up. With a small correction the mood in the Indian market has turned subdued. The momentum has withered away with market players disappointed that despite five months into power the new Narendra Modi government has not come up with new reforms, measures or policy to kick-start the economy as well as to boost investment.

It may take time for the economy to gain momentum. Today, the biggest positive for India is that crude oil prices have dipped below $90 per barrel, which will keep inflation and the current account deficit under check. The rise in demand or consumer spend can give a boost to the economy or the government will have to bring in investments. In both cases unless the government provides enablers for the economy to get back on track, it could be difficult for the market to sustain at higher levels. Last week's industrial production number reported for August was at a five-month low of 0.4 per cent.

Market players will also have to lower their expectations in terms of returns from the Indian market. First, as far as India is concerned, the mother of all bull runs is over. The last decade was when India saw the mother of all bull runs when the BSE Sensex jumped from 3,000 levels to 18,000 levels and after a correction jumped to the 21,000-mark. This six to seven times jump in Sensex was captured between 2003 and 2008.

Today, if anyone thinks the Sensex can jump six-seven times in the next five to six years then one has to lower the expectations from the Indian market. The index is not going to see any major surge of six to seven times from the current levels of 26,200 levels. In fact, the gain from the Sensex is restricted. Going ahead, it would be a stock pickers' market and the action will be in select stocks. It will be a game of patience and investors should preferably stick to stocks of companies with a strong balance sheet and lower leverage. The market is still giving premium to stock of these companies and avoiding high-debt companies with poor fundamentals.

Meanwhile, in the coming week the Sensex movement would be dictated by September quarter results of index heavyweights like Reliance Industries, Bajaj Auto, TCS, Hero MotoCorp and Axis Bank. The tension easing at the Indo-Pak border may also give some respite to the market.

On Monday, October 13, the government would also release its retail inflation data. The market expects the Consumer Price Index to fall in September from 7.8 per cent in August. On Monday, the government will also declare the September Balance of Trade data. On Tuesday, October 14, the government will announce the wholesale price index data for September. The WPI was 3.74 per cent in August.