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Playing it safe in volatile markets

| 8/29/2011 5:04 PM Monday

D K Aggarwal
CMD - SMC Investments and Advisors Ltd


The signs of a fading recovery in the US and the debt crisis in Europe are posing a serious threat to the banking sector and global growth, leading to some sort of risk aversion by investors in equity markets. The policy makers in developed nations are still trying to find some sort of credible solution to tackle their problems, and in the meanwhile investors’ confidence about the global economic growth is waning.

There is a mounting fear that the concerns in the developed nations would weigh on the global demand, resulting in lower global trade. This may be the cause of lower growth in corporate profitability, and would therefore require due adjustment in the equity markets. The major effects would be felt strongly by export-dependent countries like Japan and China.

In view of the global uncertainty, I think that this time around, the RBI may opt for a pause in monetary tightening. The global conditions, along with the recent interest rate hikes that are yet to show their effect on the economy, may dampen the domestic demand and growth, which is already showing signs of moderation. We are currently witnessing a slowdown in investment activity by corporate because of rising interest rates and high commodity prices.

One thing that was noticed in 2008-2009 was that India is not immune to global unrest. Be it through trade channels, capital flows or an overall effect on confidence, global problems do affect the domestic economy. A slowdown in global growth and sovereign debt risk in the Euro zone brings with it, a risk to domestic exports and capital flows. The Indian information technology (IT) sector, which derives almost 60 per cent of its revenues by providing services to the banking and financial services sectors in the US and in Europe, may be affected adversely, as we have already seen in 2008.

Inflation coming down below eight per cent consecutively for two quarters, as a result of commodity prices cooling off, may be a trigger for the markets. However, if policy makers in the US come up with unconventional measures like further buying of bonds, it may lead to a rise in the markets. Monetary steps alone would not help to accelerate economic growth at this point in time, and some sort of fiscal incentives are needed to spur employment as well as growth. In the light of fiscal constraints, governments considering austerity measures should plan the cuts considering the global developments and the risks to growth.

As the risks to global growth continue, it would be wise for investors to place their bets on domestic consumption themes, and at the same time, lower the exposure to sectors or companies linked to global growth. Sectors like pharmaceuticals, consumer durables, FMCG and so on, are still showing good growth, but at the same time, valuations are not that attractive. The Indian fertiliser sector could prove to be beneficial, as the government is taking a lot of steps to lower subsidies and to help the sector grow. The advice for investors is to remain stock-specific, as the volatility in the capital markets is expected to remain for some time.

 

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