Getting Out Of The Woods

[INSERT_1]

Although Asia remains exposed to global recession and financial crisis, it still has stronger economic fundamentals than other regions. Within the BRIC markets, India, in particular, enjoys an established growth potential, driven by strong domestic growth drivers. As compared to the rest of Asia, Indian exports account for just 14 per cent of the country’s GDP as on March 2008. The Indian economy is fundamentally strong and is amongst the fastest growing economies in the world. The primary issue is of liquidity. The market sentiment is bad at the moment because of what is happening in the international market. However, while the US and the European economies are either displaying negative growth or marginal growth, India is expected to grow around 7 per cent this year.

From a long term perspective, the current environment provides an ideal opportunity for investing in infrastructure, oil and gas, banking, finance and capital goods sectors. Considering that in spite of the global financial crisis Indian economy should continue to grow reasonably well over the next few years, it is likely that the core sectors of the economy (infrastructure, banking, finance, capital goods etc) would show robust growth over the medium to long-term period. One should keep in mind that stocks of these sectors are currently available at very attractive valuations. Further, defensive stocks like FMCG and pharma also look attractive. Reversely, sectors where trends have already turned negative and would continue to witness a severe impact on profitability levels and bottomlines include auto, auto components, real estate, cement, hotels, IT services, media and metals.[PAGE BREAK]

Going ahead, during the next 2-3 quarters, corporate India will face severe contraction in profits. While stock prices across have corrected sharply and most of the bad news looks discounted in the price, downward earnings revisions are yet to be factored in by analysts pointing towards a more challenging H2FY09.  Hence, in the medium term, the markets would continue to remain momentum-driven by earnings and global news flows. Some of the positive drivers for the markets could be a strong majority government post election, more than expected appreciation in the Indian rupee and higher capital flows coming back led by strong FII buying. Interest rates, on the other hand, are heading downwards and with inflation likely to move down further, more RBI monetary action is expected in the forthcoming credit policy.

India is likely to attract foreign capital flows in the long-term due to a continued GDP growth of 7 per cent in FY09 and 6 per cent in FY10.  It will also benefit from lower commodity prices. The fall in oil prices will help the fiscal and current account deficits and also keep inflation in check. This is a great opportunity to invest. Please don’t wait for markets to bottom out. Those who have the cash should look at value investing at these levels with a minimum investment horizon of at least a year. However, for a long-term investor (with a three-year plus time horizon) interested in value investing, the current environment provides an ideal opportunity for investing in infrastructure, banking, finance and capital goods sectors.