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.