Friday, May 27, 2011

India poised to become a major 'Manufacturing Hub'

India is poised to overtake China as a global manufacturing hub. Fortune 5000 global companies have shown their preference for India for outsourcing manufacturing over the next 3-4 years. With a host of these global firms setting up manufacturing facilities in India, the manufacturing sector may overtake the services sector as the major contributor to India's GDP in the next 5 years. India with its manufacturing, engineering and technological capabilities offers a conducive environment to qualify as a global manufacturing hub, provided it can overcome the political impasse and getting along with the economic reforms agenda. I am very sure this will start happening in the next 5-6 months.

Currently, India's GDP is dominated by the growth of the services sector, prominent among it being BFSI and IT sectors. But a change in trend is beginning to emerge. Historically it has been proven that a services led economic growth invariably leads to a collapse, as it has happened in the case of Iceland and Portugal. Even the Lehman brothers episode gave a big jolt to the US as a services led economy. Countries with a strong manufacturing base like China and India are likely candidates for a more sustainable economic growth.

What could be the impact of India transforming into a 'Global manufacturing hub' from a 'Services dominated economy'. Our markets will sooner than later accept this reality and re-rate the stocks from various sectors. The future belongs to the real economy rather than the virtual economy. In the emerging scenario investors are advised to focus on accumulating blue chip stocks from the manufacturing sector, and at the same time reducing exposure to service sector stocks like BFSI and IT. The next bull run which is likely to start unfolding in the second half of FY 2011-12, in all probability will be led by the real economy stocks - Domestic and foreign companies having a substantial presence in manufacturing sector. Most stocks from this sector including blue-chips like BHEL, L&T are languishing at their 52 week lows. As the markets are down and likely to remain in a subdued mode for another 3-4 months, investors with an eye on the future can start accumulating the manufacturing sector stocks which include steel, cement sector stocks which will be the indirect beneficiaries of the growth in manufacturing sector.

Friday, May 20, 2011

Dull phase in Equity Markets: Testing times for Investors

A dull phase in life can be quite a challenge. Human beings by nature love and enjoy action: We admire the gushing waves of the sea, we also get pleasure in admiring the snow capped mountain peaks, but we seldom derive the same satisfaction by watching the barren land. Equity market investors also strive for action, because the swings in the market enable them to make money. Dull phases in equity market can be quite nerve wrecking for the investors. The markets are currently passing through a dull phase and investors must learn to cope with this phase. Market analysts call such phases as 'range bound movement' or 'consolidation phase'. What should one do in a dull phase:
  • Take a break from the market: It is better to take a few days break from the markets rather than watch your portfolio move in a narrow range. This would help you to keep boredom at bay, because the more we think about the listless market, the more frustrated we get.
  • Reshuffle your portfolio: The dull phase should be used to get rid of the dud stocks in the portfolio with blue chips. The blue chips have a better chance of outperforming the markets when markets resume their trend.
  • Increase the cash levels: Dull or flat markets do not deliver a return on your capital, hence trimming the portfolio and increasing the cash levels/ debt exposure can see your capital earn reasonable returns. The surplus cash can be redeployed in equity markets once a trend reversal is evident.
Our equity markets are likely to follow range bound movement for a few months from now (say the next 4-5 months). The broad range being 5200-5700 on the Nifty. The range can be broken decisively on either side with the global news flow. The positive triggers would be: Normal monsoon, cooling of inflation, return to governance by the Govt. The negative triggers bothering the markets are: Withdrawal of stimulus leading to liquidity crises, political instability in the country, defaults in global markets etc. Let us bide these testing times without getting ruffled too much, because good times are likely to return to the equity market in about 6 months time. We need to be patient to reap the fruits of equity investment.