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Slow and steady will win the race

| 6/6/2011 11:14 AM Monday

By SAMPATH KUMAR
Chief Financial Officer, Bharti AXA General Insurance


When we compare the Indian insurance industry’s performance with that of the other emerging markets, it is apparent that the Indian markets have the lowest insurance density. However in terms of penetration, India fares better than most emerging markets. From the first reading of the results published, the increase in claims reserve for Motor Pool for previous years has affected the bottomline of GI companies. The main contributors to the overall rise in the different sectoral trends within the Indian economy have been manufacturing, construction and the service industry. Even financing, insurance, real estate and business services recorded an impressive growth rate of 11 per cent during the first quarter of this fiscal.

A stable inflation rate along with constant interest rates will be one of the triggers for the market. Further, pro-industry policies from the government will help the industry to move forward. The current inflationary scenario certainly indicates that it is taking a toll on the economy. Market reports suggest that motor fuel has risen by 33.2 per cent over the last year. One can expect the total inflation and fuel costs to trickle down to other costs shortly. The monthly inflation rate over the last four months has been 2.61 per cent. It means that out of the current 3.16 per cent inflation only 0.55 per cent came from the first eight months and the remainder came from the most recent four months. If that rate continues for the next eight months our annual inflation rate will be 9.48 per cent.

Inflation rates above 5 per cent begin to cripple the economy as we saw with the last oil spike. As the low monthly numbers continue to drop out of the equation over the next eight months we could see a significant spike in the inflation rate and possibly another round of recession. An inflationary recession cannot be fixed by printing more money. The only cure is fiscal responsibility which takes time. The risk of a ‘euro quake’ continues to increase as politicians continue to dither. Meanwhile, the ECB’s continuing hard line stance is explained by the threat to its balance-sheet of any formal restructuring of the periphery’s debt. Meanwhile, investors should keep an eye on the huge refinance requirements facing the European banks next year in term of their bond refinancing agenda. Except for Brazil, all the global indices would continue to be volatile with a negative bias.

The Indian economy and company earnings are sensitive to increase in commodity prices and with macro variables at inflection points, asset prices could be volatile. This would certainly reflect on the equity prices and would provide opportunities for the long-term investors. For short-term investments of up to three months the following sectors look attractive viz. large-cap energy companies, pharmaceuticals, technology, telecom and FMCG. For long-term investments one can look forward to banks, infra-structure, automobiles, FMCG and mid-cap energy companies.

Judging from the current scenario what I would like to suggest to retail investors is that their investment decisions should not be based on daily, weekly or monthly market movements because most investors think in terms of short-term highs and lows. One needs to remember that in the long term, cycles do not affect growth. Hence investing should always be a gradual process with a person investing surplus funds regularly to make money.

 

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