Use Volatility To Your Advantage
9/26/2011 2:26 PM Monday
Head - Institutional Client Group
Asit C Mehta Investment Intermediates
The current scenario reflects the uncertainty prevalent in global equity markets and a strong risk-aversion to equities as an asset class. This broadly explains the hurried exit by Foreign Institutional Investors (FIIs) from all emerging markets, including India, irrespective of the levels that exist for stocks in their portfolio, and also the inclination of investors to move to real assets such as gold and silver. However, the correlation between global, especial-ly developed markets, and our markets has not been very strong historically, which implies that even if the turmoil continues in the developed markets, our markets may end up trending upwards, though after a pause.
The current quarter ending September could witness a dent in corporate margins, thanks to increasing interest costs and a slowdown in revenue, which could be sharper than that of the previous quarters.
Inflationary conditions are still significantly influenced by supply-side constraints, especially when it comes to agricultural produce. All the interest tightening by the RBI, which was directed at controlling the demand-side inflationary pressures through the money supply, has lost its sting. So, inflation would continue to be higher than historical averages, till the point that supply-side constraints and bottle-necks are tackled effectively.
A slowdown in growth could continue if interest rates remain high, though it may not necessarily result in a situation where it comes to a standstill. Remember, the Indian economy has witnessed high interest rates in the past too. If there is adequate demand for goods and services, people do not hesitate to borrow at higher rates, as long as it makes business sense. The high interest rate scenario however, inhibits savings getting directed into equity markets, since passive investments (debt, gold, etc.) also offer decent returns. We would continue to see an avoidance of flows by retail investors into equity markets amidst high rates.
I have started using the term ‘sub-merging’ markets for the erstwhile ‘developed’ markets, given the fact that the rest of the world is classified as ‘emerging’ markets. We expect Europe to continue being in a state of significant turmoil and weakness, while the US markets may start seeing some normalcy, limping back in early to mid-2012. The rest of the emerging markets will be polarised between those that are self-reliant in terms of growth vis-à-vis those that are majorly inclined towards exports, depending upon the consuming markets of the US and Europe.
Going forward, the results for the September quarter and the overall health of corporate India may deter-mine the trends of the market in the future. Also, liquidity flows from developed markets to the Indian markets remain a significant factor. Last but not the least, are the government policies and how they try to rein in deficits and trends from the macro parameters.
At present, we expect autos, oil and gas, telecom and FMCG to be out-performers, while realty, infrastructure and banking will be underperformers for the next couple of quarters. Buy into markets in a staggered manner on days when there are severe bouts of correction (since these are not necessarily driven by pure fundamentals, but are a function of liquidity flows from overseas investors). Select strong, asset-backed businesses to buy for the long haul, and don’t let the volatility mislead or scare you out of investments. Use the volatility to your advantage and be patient for the turmoil to subside.
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