Do we have a bottom in place?

After three weeks of stormy weather, the sun is out this Monday morning. The US and European markets rallied after the Fed cut discount rates on Friday, writes Udayan Mukherjee.

After three weeks of stormy weather, the sun is out this Monday morning. The US and European markets rallied after the Fed cut discount rates on Friday and Asian markets should pick it up this morning. Given the sharpness of the fall, a 4 to 5 per cent rally cannot be ruled out.

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The way markets had got oversold, a pullback was on the cards anyway, and the Fed action comes as a handy trigger. Once the initial relief rally is though, the markets will ponder over the Fed move and ask whether this indeed materially alleviates the problem or is more of a confidence-boosting step. It will also wonder whether this is the first of many more steps to come. If the answer to these questions is that the illness remains, this is merely a steroid to tide over the symptoms, the volatility may return soon. Then this rally may get sold into. There is a rally on the cards for sure but whether it indicates end of the pain, in the US, is debatable. For emerging markets, one hopes this breaks the spell. Now that the downward momentum is broken, it may help investors snap out of the US-led huddle and focus on fundamentals closer home. While this is logical, it may be wishful thinking if the drawdown of money from riskier assets continues.

Closer home, the Friday midday panic was an opportunity and investors brave enough to go in would be smiling today. We have had a meaningful correction, from 15,800 to Friday’s intra-day low of nearly 13,800. A 12 per cent cut for the index must qualify as a material dip. Many blue chips are available 15 per cent off their recent peaks. Several top quality mid-caps have corrected 20 per cent from their July levels. That said, one couldn’t rule out more volatility. If the global jitters resurface, it’s tough to say whether the 200-day moving average of 4,050 for the Nifty will hold as a bottom. Our fundamentals remain solid and valuations have corrected but some potentially disturbing noise is building up on the political horizon. The market is watching with apprehension, the latest bout of discord within the UPA. Expectations of bold policy action may have been watered down but the market is certainly not prepared for the possibility of a breakdown in the central government and premature polls. It’s not got there yet but early signs are not encouraging.

Bad timing. Just when it looked like the global clouds may be receding a bit comes a local problem.

As stocks rally this morning, investors will toss all these possibilities over in their minds. The global noise, the durability of this pullback, how global money managers will approach investing in the aftermath of this crisis and the domestic political noise. None of these are directly relevant to core economic and earnings performance. Yet, they are bound to keep the environment uncertain. Some will even ask whether it’s best to stay away till the air has cleared a bit and return to the business of investing with less noise around.