Nifty has crossed the 8000 mark on news of GDP growth touching 5.7 per cent, a number last seen nine quarters back. Market pundits are now talking of Nifty touching 10,000 by next year’s budget. Though there is a consensus on the direction of the market there are reasons to look out for in the short to medium term. The move ahead might not be as smooth as it was in the past.
Here are five reasons why an investor needs to be worried about the current bull run in the market.
1) There is little doubt that the direction of economic growth has changed but the same is yet to reflect in the numbers. Recently announced first quarter numbers are yet to reflect the buoyancy of the market. However, the management sentiment has clearly improved from dismal to hopeful. It is this sentiment rather than the numbers that are getting captured in stock prices. Analysts are not extremely bullish on the September quarter growth numbers.
2) GDP numbers are not as good as they look. Though the broad GDP number has shown a growth of 5.7 per cent, the main reasons for the uptick is higher election and social spend as well as higher power production. During months leading to elections, state governments ensured lower power outages to score brownie points. Both social spending and government related electricity purchases are back to the long term average. It is highly unlikely that the 5.7 per cent growth will be repeated in the near future.
3) Reining in the fiscal deficit will prevent government spending going forward. This will affect growth and earnings of companies. Further, continued high inflation will prevent the central bank from reducing its interest rates thus adding to the headwinds.
4) The present growth rate has been without any support from the banking system. Non-food credit offtake has in fact shown a contraction. With the series of CBI raids on banking officials, lending from public sector banks have again slowed down. Public sector banks were the main lenders to the small and medium sector enterprises. Unless credit growth picks up, there is little scope for sustainable growth.
5) The September quarter corporate numbers will be viewed more closely by the market to see for signs of growth. On the economic front too, the broad growth numbers will be compared to the June quarter growth numbers. However, September quarter will not have the benefit of government spending. As for electricity, the quarter will reflect the continued poor state of affairs on the coal front which are being tested on account of not so sufficient monsoon. July core sector growth at 2.7 per cent as compared to a 7.3 per cent growth in June shows the possibility of poor numbers in the current quarter.
To add to these problems will be the flow of liquidity, especially from FIIs, which can change direction if interest rates in the US rises, as is being expected in the near future.