MMA Article: Current Financial Market Perspective
081225: Exactly one year back when we advised investors to be underweight on equities we were looked upon with disbelief, investors felt we were out of our senses as we were talking against an asset class which was delivering more than 10% returns month on month, and analysts on media were busy predicting targets of 30,000 and 40,000 on Sensex. Scenario has changed within twelve months, but not the mentality! Today “Equity” is a derogatory word and we are still being looked upon in disbelief since we are now recommending equities!
The saying is perfectly right “No price is High for a Bull and No price is Low for a Bear” Last year the buying frenzy was as if there’s no tomorrow and today people are shunning equities, again as if there’s no tomorrow. Yes, the fundamentals have changed over the period, the euphoria has fazed away and this is the time great investors like Warren Buffet use, to add on to the wealth. Even garbage is worth at a price!
The availability of cheap and easy money was fuelling the asset price bubble across the globe. Money was chasing assets wherever growth was visibly higher and hence India was clearly on the radar of FII’s and yet India was termed de-coupled from rest of the globe. The sub-prime crisis in the US has revealed the fact that though we may be decoupled on our local consumption story, our asset prices are positively correlated with the global financial system.
China was yet another factor adding fuel to the fire due to their demand of commodities over last few years. There local consumption along with Olympics gave tremendous support to metals. China is estimated to have spent around $40 billion in developing infrastructure for the Olympics. The country posted GDP of double digits for long time withstanding the interest rates of double digits. Things have slowed down there as well, with the abnormal infrastructure spending reaching a saturation point. If one notes closely the commodity prices have drifted down after the Olympic led demand died.
The current crisis is seen at par with the economic crisis of 1929 but the world may take lesser time this time to recover and get back on track. The main reason being the governments and the central banks across the globe are determined to fight this crisis with iron hand, which is being done by continuous decisions to inject liquidity into the system in order to bring back the confidence in consumers thus hoping consumer spending would revive over time. The second reason being, information flow today is much faster compared to the earlier crisis. Consumers are well informed what steps the government’s across the world are taking and the information about its impact on overall economy along with the expected time is immediately discussed on media. Bad news takes its toll immediately but good news takes time to revive sentiments, sure it would.
India is feeling the heat as well. September quarter corporate results clearly point towards a slow down and December quarter results are expected to be dismal. The advance tax numbers, excise/direct tax collections, IIP number etc., are already worrying. Companies across industries have built up huge inventories in order to profit out of rising commodity prices, which in turn have reversed sharply and the slowdown in consumer spending coming as a double whammy, almost all major purchase decisions of ours are being pushed for future isn’t it? The companies are likely to show losses on inventories over next few quarters until the stockpile is drained out.
The silverlining for India is we are talking of a slowdown when all other countries are talking about a recession. The worst-case scenario predicted on GDP growth is still at 6% to 6.5% for the year 2009-10 compared to developed countries predictions of 0% to negative growth. The world cannot ignore a country like ours with such growth and it is just a question of time when money would start flowing back in to the economy. In fact expect India to outdo China in years to come, as China would take direct brunt on the exports front since they are dependent more on currently limped nations.
Government can easily fuel Indian GDP by taking decisions on infrastructure spending. India is infrastructure hungry and if proper initiatives are taken, infra sector alone can deliver additional 2% on the GDP. Lot of commitment is required on the ground, we are already seeing the lurch in which common wealth games scheduled for 2010 are in! Crude is a commodity, which constitutes very large percentage of India’s import bill and we all know how sharply the prices have corrected. India should take steps in order to make the best out of the situation.
Indian government is already doing its bit to increase consumer confidence by way of stimulus packages and interest rate cuts. The commerce minister has announced that second stimulus package will be announced shortly. The government is lucky as it has this huge money available to spend which it has profited from the drop in crude oil prices and the rise in Dollar against the Rupee. We as consumers are lucky as parliament elections are just few months ahead, which may have (rather has) forced the government to announce these goodies so that the ruling coalition does not face the brunt of voters. Expect more voter friendly decisions as we approach the elections. The only concern is the recent pattern witnessed in state assembly elections that point towards a hung parliament.
So what does one do with his money in this scenario? One plan can’t suit all, personal financial planning would definitely differ from investor to investor. Most of the investors indulged in adventurous buying few months before, be it stocks, commodities, realty, precious metals, etc., literally everything has eroded investors wealth. (Wish there was an option to buy inflation!) All categories of investors can use the present scenario to their best advantage. If the risk taking ability is very low and safety of the money is your primary concern then ‘NOW’ is the time to go for debt. Huge opportunity has already been missed as the RBI has already cut various benchmark rates drastically, but there remains room for more drastic cuts in months to come supported by the falling inflation, which is expected to be steep as well. There are various other factors pointing towards a sharp decline in interest rates, discussing those can be avoided here. Considering the tax implications one can choose in which debt product to invest.
Investors holding money with longer time horizons can look at equities. Distressed market is the best friend of an investor. Traders can come in and go out at any point of time but finding market with pessimism looming large, like the present one do not knock our doors again and again. Equities are not expected to make any large move until new government is instated at the centre. Stocks would trade within a range, build a portfolio gradually over next few months with intentions of holding for atleast few years.
Those intending to invest both in debt and equities along with other products should carefully build a portfolio, which should be reviewed periodically. Reading the first para of this writeup one can easily realise how long twelve months could be in today’s financial system which is totally coupled with rest of the world.