Inflation plays the spoilsport again

Inflation has been spreading its tentacles on the growth prospects of the economy. This has prompted RBI to once again increase the REPO/ Reverse REPO rate by 25 basis points each. What is more significant is that RBI has maintained a hawkish stance, giving rise to speculation that further rate hikes are not ruled out in the future. The markets have taken these indications seriously, as most market men fear the rising inflation and the corresponding hardening of interest rates as a big negative for the markets in the medium term. The continuous slide in the equity markets is likely to continue for a little while longer, given the current economic scenario.

The intermediate downturn in the markets is likely to provide long term investment opportunity if the markets were to slide by another 5-10% from the current levels. Investors are advised to keep their shopping wish list ready to take advantage of the panic situation in the markets. The rate sensitive sectors such as Banks, automobiles, FMCG are likely to take a major hit in the near future, and would thus become attractive bets for long term investment. Another good opportunity for the risk averse investors would to put some money into the tax efficient FMPs being launched by the various mutual funds to take advantage of the double indexation benefit associated with the FMPs now on offer.

However, with the liquidity crunch real estate sector will continue to reel under pressure, which is likely to reflect in the downward movement in real estate prices in the medium term. Real estate prices lag the stock market downturn, hence the cooling off of real estate prices, especially the residential real estate is likely to cool off from the first quarter of next fiscal, as the Realtors will be forced to sell the residential space at a discount given their inability to raise enough resources from the markets.

Market Mayhem: An opportunity to invest for long term

Indian equity markets have gone into a tailspin in the first fortnight of 2011. At the current levels the Nifty and the Sensex have both corrected 10% from the peak recorded on Diwali day. Investors need not panic in the current situation, because this sharp fall has presented an opportunity to buy your favourite scrips at bargain prices. This situation should be seen as a "Sale" at discounted prices. The investors should approach this opportunity with the same enthusiasm as consumers throng to the retail market during a "Sale".  Investors should refrain from acting like traders, rather they need to grab this opportunity to create a long term portfolio.

The concerns on inflation and a marginal slowdownin the economy were inevitable and were visible even 3 months before, but were ignored by the market traders at that moment. Today they are being blown out of proportion to create panic amongst investors. The same analysts/ traders who were gung ho on Indian equity markets the other day are selling in panic. The markets in the long run have always rewarded the performers and punished the laggards. The situation will be the same this time too. As the quarterly results unfold we would see sharp corrections in the stocks that had run up in expectation of spectacular performances. It a good time to churn the portfolio by getting rid of the underperformers and including new stocks that have shown promise for the future.

With the Sensex and Nifty now trading at 15-16 times 2011-12 earnings the risk-reward ratio for investors has turned quite favourable. This should result in a yearly gain of around 20% from the current levels, which is quite attractive. The fixed income instruments may seem attractive on the face value, but they may still not be able to beat the inflation in the long run. Equities do remain the best bet for wealth creation in 2011 as well. But long term investors should be mentally prepared to expect another 5% downfall in the broader indices if the negative sentiment prevails longer. However, it would be safe to conclude that the current levels in the equity markets are an opportunity to start investing systematically. Investors are advised to continue their SIPs without panicking, as the growth prospects of the Indian economy remain bright as before.