Invest systematically and for the long-term

By RAJAN KRISHNAN, CEO
Baroda Pioneer AMC

Challenging times’ are the words that, I feel, can best describe the current scenario. On the domestic front, we are passing through a higher interest rate regime, which, in turn, may negatively impact the earnings prospects of India Inc. One thing we must remember is that we live in a global village. Therefore, higher interest rates, coupled with the developments in Europe, are likely to have a negative impact on the markets. Despite a strong domestic economy, we are more susceptible to global events now than ever before. The concerns are mainly on two fronts; earnings and the debt crisis. We may see some respite with commodity prices coming down, but it cannot be denied that we are facing challenging times at present.

At this juncture, we are passing through the earnings season for Q2 FY12 and H1 FY12, and we may witness some pressure on company financials in this quarter, on the demand as well as on the cost side. Rising interest rates have surely played a dampening role. There are companies in sectors like the FMCG space who were able to pass on their costs to the consumers, and these may post better results as compared to others.

Now, if we look at the banking sec-tor, we can say that it has witnessed better earnings in the past. However, in the current scenario with rising interest rates, it may face some challenges on the treasury income side, and there will be pressure on the advances growth and on the net interest margins. I feel that there will be some pressure on the banking sector in this quarter. As a whole, it can be said that interest-sensitive stocks like automobiles are likely to face some strain. Investors can look at sectors that are less prone to higher interest rates, like telecom or IT.

One of the burning problems that we are facing today is that of higher inflation and interest rates. One is related to the other. Rising inflation has seen interest rates go up. The RBI believes that by hiking rising interest rates they will be able to diminish demand, and that will tame inflation. This definitely happens, but with a lag effect. It looks difficult to estimate that lag, and doing it on the demand side without the government working on the supply side does not make sense. We have 30 to 40 per cent wastage, and we are actually paying for the wastage. I think that there is a need to curb the demand side, but there is also a need to take a look at the supply side, whether for the infra-structure or better distribution.

Interest rates, on the other hand, are peaking out. The RBI may hike rates one more time in their next policy meet, but beyond that we have no idea. However, it is likely that the RBI takes a pause before hitting the reverse gear.

On the global front, it is clear that the focus is on Europe, and all eyes will be on them to see how they will deal with the crisis they are facing at this point of time. There has been a situation of political inertia in India, and any step by the government will act as a trigger for the markets going forward.

Looking at the present scenario, we are bullish on sectors like telecom, IT and consumer staples. I have always said that it is a good idea to invest for the long term and in a systematic way. One cannot deny the long-term benefits of equity. Therefore, look for SIPs in perpetuity, till the time you are able to spend. Invest when you can and withdraw when you need to.