DSIJ Mindshare

Choose Your Investment Strategy Wisely

Nagji K Rita
Chairman & MD,
Inventure Growth and Securities


The sharp rise in the rates of USD/INR, debt issues in Euro-zone region, challenges in the US and high crude prices have collectively taken a toll on the Indian markets. Domestically, the high inflation rate has led to higher interest rates, and as a result, the cost of capital has increased. Further, high commodity prices are exerting pressure on the operating margins of companies. Weak industrial production numbers are clearly indicating that the manufacturing sector is going through a tough phase, where production/demand is reducing but fixed costs are rising. This is expected to weigh on the profitability and sustainability of firms with high operating cost structures. Consequently, stock prices too are reacting negatively.

On the earnings front, going by the weak industrial production numbers, it is widely expected that Q3 FY12 could be weaker than Q2 FY12. We expect the operating margin pressures to remain on manufacturing industries, which would affect their overall performance. High dollar rates have also led to a rise in the servicing cost of the dollar denominated debt held by several companies. Overall, a negative impact will be witnessed by the markets as a whole.

Rising inflation has had an adverse impact on consumption and demand. The expectation is that as the base effect sets-in, inflation will decline. However, in absolute terms, the rise in cost has been sharp and would continue to eat up the savings and investable surplus in the hands of the retail investors. Any correction in inflation rates would ease liquidity in the hands of people, and would at least do away with the need to raise interest rates in the near future. This would be sufficient to cheer up the market mood. Thus, there could be a positive impact on rate-sensitive sectors such as auto, realty and banks.

Rising interest costs are increasing the overall cost of capital, and the cost of acquisition of assets has gone up. If the government is able to control inflationary pressures, this would significantly reduce the need to raise interest rates further. In addition, any announcement of reduction in rates could cheer the markets.

The challenges faced by the Euro-zone and the US are of larger proportions. The Euro-zone crisis is expected to roll on for some more time, wherein the situation may not worsen but will not improve in a hurry either. We believe that only bailouts will not work, rather the economies need to find ways of increasing their GDP growth.

As we step into CY12, the markets will start building expectations from the Union Budget. Any tax/duty cut (viz. STT reduction) could trigger a rise in the markets. Further, market participants are eagerly awaiting news on reforms. Also, any reduction in interest rates would be a positive. Conversely, a non-eventful budget and delays in policy/reforms could worsen investor sentiment.

Policy reforms could trigger buying in the related sectors. Recent developments suggest that aviation, as a sector, could see some policy changes. Infrastructure too could get a boost, if any fresh government investment is announced in the sector. Any reversal in the overall trend of the market could bring the momentum back even in the banking sector.

Retail investors can choose an investment style based on their investment time horizon and risk appetite. One could choose to be an SIP investor, a bottom fisher or a momentum trader. An SIP investor could use every dip or rise in the market for averaging and increasing his/her investment base. A bottom fisher may wait for some more correction before he/she invests a large pool of money. A momentum trader may use the volatility to trade long or short in the current market scenario.

SPANNER IN THE WORKS
•    Weak industrial production numbers are clearly indicating that the manufacturing sector is going through a tough phase where production/demand is reducing but fixed costs are rising.

INTEREST IMPACT
•    Rising interest costs are increasing the overall cost of capital, and the cost of acquisition of assets has gone up.

WHAT CY12 HOLDS
•    As we step into CY12, the markets will start building expectations from the Union Budget. Any tax/duty cut (viz. STT reduction) could trigger a rise in the markets.

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