Stay Away From Speculation

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On the international front, the world economy is yet to come out from the woods. The financial meltdown, owing to excess leveraging and the resulting liquidity crunch which precipitated the prolonged correction in all asset classes, is still haunting businesses across the world. Consumers now perceive higher risks and have shunned their appetite to consume more. Those businesses currently facing a slump in demand are now in the process of drawing up new plans to tackle the current situation. The way government fiscal packages, support grants and monetary policies are framed would decide the course of businesses in the near future. At least a few quarters would pass for the policies to have any effect on stimulating a fresh demand cycle.

The fall of most world market indices has proved the level of integration that exists between the developing economies and the developed ones. The fiscal and monetary policies of governments across the globe, including India, are the most important factors to watch out for in 2009. The lag that was seen when the crisis set in developing economies is also applicable as far as recovery in developing economies is concerned. Proactive policies in favour of growth and the reduction in the risk appetite of consumers will decide how soon all the affected economies will step out of the crisis.

As for the scenario in India, owing to several factors at play and also due to the uncertain business environment, it would be difficult to cite now as to at what point of time the market will stabilise. When investors begin to see clarity and visibility of corporate earnings, we can expect the market to find its balance. In view of the fact that overall economic growth is expected to be dented, most sectors are likely to show de-growth. As such, stocks of most sectors look attractive for investing over a long term. Some of the sectors move irrespective of the general economic trend and are therefore likely to benefit. One such example is the sugar sector.[PAGE BREAK]

The other sectors that can be expected to do well include those which would depend more on local consumption than overseas markets for their growth. Sectors like power, infrastructure, etc which are likely to attract large public and private investments are some of those that will do well over medium to long term. Meanwhile, the fiscal stimulus packages announced by the government coupled with the monetary easing by the Reserve Bank of India would benefit the Indian economy but with a lag. The Indian markets have now integrated with global markets to a large extent and the effect of foreign participation in the Indian markets has a bigger role in deciding the future trend.

The forthcoming general elections will have an impact too. It would, however, have a lesser effect and be more short-lived than before. In a slowing economy we expect the IIP numbers to tread a downward trajectory, as a fall-out of which the Q3FY09 results are expected to throw up some bad numbers. Many companies might report de-growth at the net profit level and also at the EBITDA level in some cases. While markets seem to discount negative expectations from the quarterly results, any negative surprises cannot be ruled out. If the measures taken by the RBI so far do not bear fruit or meet the purpose, there is no doubt that fresh measures, including a further decrease in interest rates, will be taken by the central bank.

Sectors like construction, infrastructure, automobiles and banking might benefit if interest rates fall further. While consumer demand is a more vital factor as of now for growth, monetary policies like interest rate cuts are likely to act as catalysts. Retail investors must focus on long term wealth generation and should stay away from taking speculative calls. Current attractive valuations indicate that these are times when an investor should draw up plans for long term investment. With several factors at play it would be in the best interest of any investor to hand over his money to a professional agency like a mutual fund to play the cards right.