Global Economic Slowdown: Equity Markets in turmoil

Global economies led by Euro zone are heading towards a major slowdown/ recession. The economic factors emanating in India are also indicating a significant downturn in India's growth prospects in the current fiscal. The global crises in the long run needs to be tackled through fiscal measures such as tax cuts and creation of employment opportunities. But the G-7 countries have tried to address the issue by printing currency, which is fuelling inflation in the Asian economies. Another round of quantitative easing (QE) may be a stop gap arrangement to address the issue, but it may have long term negative impact on a sustained economic recovery. Default by several Euro zone countries like Greece, Spain, Italy is looming large at the current juncture.

In India, inflation continues to be closer to the double digit levels, forcing the Central Bank to continue with the unabated rate hikes. This does not auger well for India Inc. as the profitability of companies will be under severe stress. Another round of rate hike is definitely on cards on the 16th of this month. The dismal IIP data released today reflects the slowest growth in factory output in the past 24 months. Indian equity markets are trading at 14-15 times forward earnings at current levels, which is expensive on a comparative basis with the other Asian peers. The premium that our markets command is bound to get corrected with an impending slowdown in the Indian economy, unless some drastic policy measures are initiated by the Govt.

Our equity markets are likely to remain highly volatile in the near term. The major indices are likely to retest their recent lows (4720 on Nifty, 15700 on the Sensex).  Investors are advised to keep a watch on these levels, and if the markets decide to consolidate around these levels it may prove to be a decent investment opportunity for the long run. The focus should be on investing into those companies that have a minimum debt on their books, because they are the ones that will survive a major earnings downgrade. Corporate earnings for the September quarter, which would start flowing in a months time would confirm this view. Meanwhile, the markets would continue to be governed by global economic news.