It has been a challenging period for investors in equity, as the broad indices have remained flat for almost four years now. However, investors must keep in mind that equities have delivered decent returns over a longer period, and thus, they should maintain the discipline of asset allocation. In fact, the volatility induced mainly by global factors is offering investors an opportunity to participate in the structural growth story of India.
While markets swing to the changing moods of investors most of the times, they tend to track performance against expectations. At the beginning of the year, there were expectations that the government would take action to revive the slowdown in the investment cycle and that inflation would cool down by the middle of the year. However, as the year progressed, things kept deteriorating on the macro, policy and execution front.
While the consumption leg of the economy maintained its momentum, investments failed to take off. The latent demand growth has displayed resilience during the adverse periods of high inflation and even higher interest rates (thanks to the policy choice of inflation control over growth sustenance). The demand growth though, is showing enough stress as we come close to the end of the year, post a relatively sluggish festive season.
We are entering the new year with more apprehensions. Almost each of the macro and micro variables (GDP growth, IIP, inflation, credit growth, currency and the global macroeconomic situation) is at the tip-off. Equities investors – both local and global – seek growth sustenance, policy predictability and a favourable currency bias. Each of these pegs is under a scanner as the new year sets in, almost forcing India down from its pole position in terms of global attractiveness.
2012 would also subject the global financial markets to an acid test of their existing ecosystems. The impending situation in Europe (the nature of outcome of which is as uncertain as it could be) would be a natural undercurrent to money movement across asset classes, and India cannot remain aloof to the developments.
Corporate India seems reluctant to commit new capital locally. Most of the capex has either been stalled, delayed or suspended. Rising wage costs, burgeoning interest payments (adverse currency in case of ECBs) and high energy costs have contributed to higher operative structures. Corporate earning expectations have been downgraded, and may reach their highest decibel in the next two quarters.
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