More Pain, Longer Recovery for Indian Stocks: Experts

A dark shade of red was cast over Dalal Street on Monday. Euro zone debt concerns took centre-stage once again, and markets across the world sold off. The shockwaves were felt back in India too and the Nifty broke the 5,400 support to close at 5,386, while the Sensex closed below the 18,000 mark, with a 330 point cut.

An Indian stock broker watches his computer screen at brokerage company at the Mumbai Stock Exchange.
Indranil Mukherjee | AFP | Getty Images
An Indian stock broker watches his computer screen at brokerage company at the Mumbai Stock Exchange.

You may have thought last week's 1 percent fall was enough bad news, but the markets had other plans—the hurt doesn't end here. Experts say there's more pain left in the system.

There was no shortage of negative cues—from worries over Europe's sovereign debt crisis, to India's troubles with high inflation, to futures and options expiry on Thursday, to talk that the government may price State-run power equipment maker BHEL's follow-on public offer below the current market price — and an already sour mood on Dalal Street became worse, leaving traders with a bad taste in the mouth.

But JP Morgan's managing director and chief emerging market strategist Adrian Mowat says all emerging markets are seeing pain, so India's situation is not a cause for concern. "I expect earnings to be revised down in India, but that doesn’t make me relatively more negative on India, because it’s a trend that I am seeing in other emerging markets as well."

Experts add that a recovery will begin only when some liquidity comes in. "The flow dynamics in India are changing and in this a meaningful point is that last year we saw outflows from both local mutual funds and local insurance companies. The level of outflows is moderated considerably in India this year. So a smaller level of Net FII buying will be sufficient to push this market up," Mowat stated.

Market analyst Sangeeta Purushottam, said, "The only thing which can actually work in favor of the market at a time when they are grappling with a whole lot of fundamental issues is if there is an inflow of liquidity like what we saw happening a few weeks ago but in the absence of that internally there aren’t enough factors to sustain them at higher levels."

So when will we see a sustained recovery?

"I think if we do see improvement happening it will probably be towards the tail-end of the year or it may even spill on to the next year when we start focussing on FY13 numbers and we have some sense whether the tightening cycle is behind us," Purushottam said.

So for the moment, it looks like the market will have to endure some pain till the negative factors are expunged, prices ease, and growth gets back on track.