Tuesday, February 06, 2007

Topic "Stock market boom..." - Complete analysis

When you think that you don’t know much about a topic, try and draw parallels. Note that the boom in the stock market is similar to the real estate boom and hence you can derive lot of points from there. Read the points below and try to relate to the real estate market and you will see parallels.

About reading up about the markets, I am sure you can find a lot of material on the net. Beware that many analysis on the net may be leaning towards the current market sentiment (bullish). When the market is going up, analysts say it will go up. When it goes down, they say market is booking profits. When I goes further down, they say it was anyway overheated and is consolidating. If it goes down further, they say market sentiment is weak and investor has to be cautious :)

I think we have covered decent number of points here avoiding the clutter. And you can do deeper analysis in the next two years of your MBA

My additional points for the group (I have avoided being too technical and heavy)
Reasons for going up
1. The equity market has matured more. That means that there are enough buyers and sellers. It also means that the price discovery is based on valuation, rather than rumors and sentiments

2. More retail buyers as it is easier to trade than it was a few years ago. Online trading also has come into picture and with a lot of money with the IT industry, good investments have come from the retail investors

3. The consistent strong results across sectors quarter after quarter has fueled the market.

4. There is a lot of bullish sentiment on the future of the economy and the top companies. So strong results and strong outlook for the future have fuelled the growth in the market

5. The futures and options market is maturing well. Hence there are more balancing factors in the market now.

6. Though there have been some scares before, it is not true that FIIs can just pack up one day and leave when they see a better prospect. They are prudent investors and spread their risk. Any other country like China will have to prove themselves for long (like India has done for almost 15 years now). Sometimes, even a small FII withdrawal can cause market panic, which may not have a strong basis.

1. The PE ratios are on the higher side even with the confidence. It is difficult to believe that the confidence has doubled in just one year.

2. Though some of these positive factors have been there for a long time, the rise has been recent and sharp adding to the concern that there is some speculation involved

3. There have been many market manipulations that have been caught recently. This may indicate that the market still needs to be cautious

Good points made by the group
1. Strong FII money flow has had a strong positive impact

2. Good monsoon for the last two years.
----- Remember many industries like FMCG, Auto etc are almost directly impacted by monsoon

3. US/European money flowing in search of better returns is a very good point.
----- It is not necessarily coming because of the slowdown though, but because India is in a growth phase and US in a mature stage. (It is like investing in growth stocks Vs Blue chip stocks)

4. There has been a broad based rally. This shows the confidence in the country as a whole rather than an industry or a few companies

5. US trade deficit is a cause for concern.



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