Global economic issues & scandals affects stock index

The Sensex can start its journey on a positive note and witness a gradual decline by the end of that week. The unpredictably strong bouncebacks and reticent movements are usually the result of a host of unrelated events.

These are not mere domestic triggers that impact investor sentiment. Global developments , economic issues and even scandals have a bearing on the stock index.

Global movements

Investors cannot rule out the possibility of a storm in the domestic markets if there is turmoil in the global markets. Be it US central bank's decision to cut federal fund rates or recovery of Asian equity indices. The impact is obvious. The looming fears of recession elsewhere , in US and Europe, took a heavy toll on the Asian markets.

Since the domestic markets are not decoupled from the rest of the world, the impact will be felt here. Hence, domestic players cannot afford to overlook the performance of the Nikkei, Shanghai Composite, Hang Seng, Straits Times or Taiwan Weighted.

Monsoon effect:

The delayed monsoon has sent the prices of vegetables soaring high. To add to the woes, the price of pulses has touched the roof. The problem in the agriculture sector has come back to the consumers as food inflation.

Since the yield is low, consumers must be prepared to spend more on food. It will adversely impact the agriculture-associated industries. The government's response to the delayed monsoon needs to be closely watched.

Liquidity:

Both liquidity and risk appetite in the markets is currently high and that is good news. The Reserve Bank of India (RBI) has softened its monetary policy and reduced interest rates several times. The move was to counter the global slowdown and stimulate economic activity.

When deposits yield lesser interest rates, investors will find equity a better alternative to debt. However, government borrowing to fund its various programmes can cause a liquidity crunch in the future.

Foreign investor:

Foreign institutional investors (FIIs) are a powerful force to reckon with. FII inflows and outflows have a tremendous bearing on the equity markets. FIIs lend a hand in both making and breaking the markets. Continued FII interest in the equity markets or sustained buying will push the index up. Consequently, it triggers the interest of other major players. This could peak into a bull market condition.

On the contrary, what if FIIs decide to pull out their lot from the markets? Sustained selling can cascade into a big fall or a bear market condition.

Go by fundamentals:

Markets movements are susceptible to political developments , major political decisions, political stability, oil prices, economic factors, global forces, inflation, and even rumours. Sometimes it becomes difficult to predict why the market behaves in a particular fashion. Fundamental analysis is an unfailing method to determine the market behavior.

Analysts predict that the valuations are currently challenging. A host of factors go into fundamental analysis including current financial health of the company , projects in the pipeline, growth plans and merger/acquisitions. It is important for investors to be more alert and informed before locking their hardearned money in equity.