Is bad news actually good news?

Thu, 15 Sep Pre-Open

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Greece is once again at the brink of default, and European banks holding Greek debt are now under the scanner. Globally there are fears that this would set off another financial crisis which may be even worse than the one seen in 2008, post Lehman Brothers' collapse. The world's largest and most indebted economy, the US is also facing its own set of issues. Americans are staring at a lost decade, where people are worse off now than they were in the 90s. Unemployment is high and the future outlook is gloomy.

With so much uncertainty and negative sentiment on the horizon, mutual fund managers are refusing to bet on the equity markets. They have cut their positions in equities and are instead sacredly holding onto cash. Average cash balances are at a high 4.9%. Plus, for the first time since May 2009, fund managers are underweight on equities. Even hedge funds have cut their net exposure to equities to 19% as opposed to 33% in August, the lowest level in 15 months. According to Bank of America Merrill Lynch, risk appetite is at a 30 month low.

Well, wouldn't you prefer to visit the shopping mall when there was no one around? You could leisurely browse along and not even have to wait in a line at the cash counter. Well, in this market with few buyers and a number of sellers, you can leisurely take your pick. But the question is, are you brave enough?

Global markets may see a rally if there are positive policy announcements. However, even Bernanke's Jackson Hole speech and Obama's jobs statement failed to enthuse markets. People are struggling to see what kind of positive information could propel markets further. There are fears that deterioration in current economic sentiment may affect stocks and commodities further.

Fund managers, however, continue to be bullish on emerging markets. But, things are not all hunky-dory, especially in India. The BSE-Sensex is down around 20% since the start of the year. The rupee has also depreciated significantly on account of huge FII outflows in August 2011. The Indian rupee recently hit a 15 month low at Rs 47.6 against the US dollar. Currency depreciation and higher crude prices could put additional pressure on India's oil bill and thus its current account deficit. The latest IIP (Index of Industrial Production) growth data of 3.3% in July is also far from comforting.

But there are a few silver linings. Valuations in Indian markets are getting cheaper with more and more bad news floating around. Bluechips are at their 52 week lows, and bears are flooding the market. So now is an opportunity to pick up good stocks at reasonable valuations from a long term perspective. Going forward, various reforms and moderation in central bank's aggressive interest rate stance may act as positive drivers for the stockmarkets and the broader economy.