Wednesday, November 30, 2011

'Murky Politics': Could burn a deeper hole in your pocket

The political scene in India is becoming murkier day by day. There is total anarchy in the functioning of our parliamentary democracy. In such a situation investors are advised to stay away from the equity market, and wait for the dust to settle. As things stand today, there is a total failure of governance and the blame has to be equally shared between the ruling party and the principal opposition party. The govt. of the day is in the saddle not because of its achievements but because of the 'TINA' factor. And the main opposition party is so bankrupt of ideas that it cannot think of coming back to power on its own strength, therefore, it is putting spanners in the functioning of the govt. The BJP's eternal 'PM in waiting' is making things worse for his party.

What could be the immediate fallout of this political logjam on the financial markets:
  • Growth would suffer badly and the danger signals are fairly loud and clear. The GDP growth for Q2 has dipped to 6.9%, with core sector growth slowing to a meagre 0.1% and some sectors such as mining showing negative growth. The ongoing projects are already suffering due to lack of capital, while many sectors like power sector are facing an acute shortage of raw materials.
  • The signals for the foreign investors are extremely negative, which is leading to a free fall in the value of the Rupee. Any further depreciation in the value of Rupee could lead to throwing the Govt's finances to the winds, the fiscal deficit coming under tremendous pressure. It is already threatening to destabilise several industries such as Aviation and Oil & gas.
  • Imported inflation continues to haunt the policy makers. Higher inflation emanating from import of essential goods is not allowing the RBI to reduce rates despite being fully aware that the high interest rate regime is crippling growth.
  • All the above economic factors would lead to a serious erosion in the earnings of our corporates, leading to downgrades across sectors. Ultimately the equity market will discount these earning downgrades and would punish the companies. Stock indices would follow siute with strong downward moves.
There is a very serious threat to a further erosion in the investors' wealth. The only way you can protect your wealth is to stay in cash, generate more cash by selling on every rise, and wait for a panic situation to emerge to deploy that cash. Many analysts are today talking of levels between 4100-4500 on the NIFTY to be achieved fairly soon. The temporary infusion of equity by central banks may push the Nifty towards 5000 levels in the very short term, which will present a golden opportunity to lighten your equity portfolio. And, god forbid, if the incumbent govt. were to fall, the chances of which are fairly high, the country may be pushed into a mid-term election.The equity market would seem like a 'bottomless pit' in such a situation, reminiscent of the 2008 doom. I sincerely hope this does not happen, but investors should be prepared for the worst case scenario and act accordingly.

Monday, November 21, 2011

Loosen your purse strings as panic sets in

A panic situation is building up in the markets, and this is the right time for long term investors to make a killing in equity markets. So far the markets have been falling in slow motion but the panic is about to set in. Far too many negative factors have emerged for the markets, but the silver lining on the horizon points to the fact that we are nearing the end of the gloomy scenario, after a knee jerk reaction on the downside. Long term investors need not panic at this juncture as this is an opportune time for long term wealth creation. Let us analyse the domestic and global factors that will soon signal the revival of risk appetite in the markets.

Domestic Factors:
  • Rupee Depreciation: Indian Rupee has nosedived to 3 year lows against the dollar and other global currencies. It is likely that rupee will stabilise around Rs.51-52 to a dollar, and thereafter show some appreciation in January 2012. The stability of the Rupee will likely lend a helping hand for revival of equity markets.
  • Inflation: The stubborn inflation that has been inviting a hawkish stance from RBI towards interest rate hikes is giving indications of a cool-off. Even if inflation growth remains at the current levels, a low base effect will ensure that the inflation figure will move towards the sub 8% levels by the end of January 2012. This will signal the end of a rising interest rate cycle, paving the way for growth in corporate earnings in last quarter of current fiscal.
  • Political stability: A stormy winter session of parliament is likely to provide some hiccups to the markets, but stability is likely to be restored towards the end of the session. The govt. may revive the reforms agenda in the winter session, which is likely to be watched carefully by FII's. Financial reforms will pave the way for restoration of confidence in the Indian economy.
  • Valuations: The valuations of Indian stock market at 4800 on Nifty have become attractive. The risk reward ratio is quite favourable at these levels, the downside risk being limited to a dip of another 5-6% only from these levels. The upside could be as high as 25-30% from these levels over the next one year as the market tries to rebound towards the earlier high of 6300 on Nifty by end of 2012. In the interim, the markets could dip to around 4500 levels on Nifty, which level could signal a strong rebound.
Global Factors:
  • Euro zone crises:  The euro zone crises is likely to play out in another 2-3 months with more downgrades in the offing. The positive impact of the crises for Indian economy could be felt in the shape of falling commodity prices. Crude oil prices have started to cool off despite increased winter demand from US. Softening commodity prices will have a positive effect on the bottom line of Indian corporate sector.
  • Revival of US economy: US economy has been showing signs of revival, which augers well for Asian economies. This will revive the investment cycle in Asian economies, and we could see a growth of FII flows into India. Risk capital is likely to resume its flight towards India as the investment cycle turns favourable. Strengthening of the rupee will help this cause.
Investors are advised to revive their risk appetite and start investing in equity markets for decent gains over the next few years.