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A Few Positive Triggers For India

| 9/26/2011 2:31 PM Monday

Nipun Mehta
Award Winning Private Banker & Market Expert


More than three years after the sub prime crisis, two rounds of quantitative easing in the US and several rounds of funding of global banks later, the global economy, particularly the developed world, still has the looks of a sick company. Talks of a possible double dip recession persist, the world’s largest economy has been downgraded, the largest banks in France have been downgraded, with a few more in the pipeline, and as many as five countries in the Euro zone continue to be at the edge, and could default anytime.

All of this has had a sprinkling effect on global financial, commodity, bond and capital markets, beside others. While most internally-driven emerging economies have not been significantly affected, economies like India have had their own share of pain. We have now seen 12 interest rate hikes within a span of 18 months and four petrol price hikes during 2011, which resulted in a 22 per cent rise in the petrol price despite falling global crude oil prices. Price inflation appears to be beyond the government’s control for more than two years now, which is making the RBI look like a one-man orchestra.

For an internal consumption-driven economy like India, the impact of the global developments hasn’t been significant. The economy has continued to grow at more than 7.5 per cent, despite the lack of economic reforms and the absence of much-needed infrastructure spending by the government. However, in the light of slowing domestic GDP growth, among other fears, there is also increasing concern about the high interest rates affecting credit growth further, and about an increasing lack of earnings visibility for future years, in cases where capex is getting unduly postponed.

The global uncertainty will ensure that Indian equity markets remain in a range-bound mode till risk aversion reduces, and funds start flowing towards emerging markets. Commodity prices and crude oil are likely to continue drifting due to reduced speculative positions as well as potential lack of demand from the US and the EU. However, the positive triggers for Indian markets will be when inflation and interest rates start falling, or when FII liquidity starts filtering in, or to a lesser extent, when the US and Euro zone economies show a turnaround.

Investors in Indian equity markets should be prepared for some more pain for their investments. While valuations look attractive, the investment horizon needs extend to at least another two to three years for them to bear fruit. Fundamentally, the banking sec-tor has showed resilience over the last three years, and will bounce back fast from current valuations when the markets revive. Keep dipping into it. Infrastructure companies’ valuations appear extremely attractive, but will continue to drift till there is govern-mental inaction in project implementation. Ditto for capital goods stocks, which have been dragging their feet for far too long, but should change tracks once interest rates turn around.

Since it is impossible to buy at the bottom and sell at the top, it is always advisable to track your subset of fundamentally sound Mid-Cap or Large-Cap favourite stocks, and keep adding whenever markets fall. At seven to eight per cent GDP growth, an internal consumption-driven India story continues to show promise.

 

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