India To Emerge Unscathed

[INSERT_1]

There has been an unprecedented financial crisis across the globe in the recent past which is now having an impact on the real economy. As a result, we are witnessing an economic slowdown globally. India has also been affected by this global crisis. Although India’s resilience is high, it cannot remain immune to the global events. The liquidity crunch and increasing risk aversion has caused a sell off in the equity markets across the globe including India. As a result, markets have been volatile through out  this year. We expect the volatility to continue in the short term as economies of the world emerge out of this crisis. However, in the medium term, as liquidity improves and economies stabilize, we expect that the markets would also stabilize.

The equity markets across the globe have seen a sharp decline amidst negative global cues arising out of liquidity crunch and recessionary conditions. The Indian market has corrected sharply from its peak level. But given that the GDP growth is expected to be moderate in the future, the markets may remain range-bound. The risk reward is favourable for investors over the medium term.

While the GDP growth is expected to be moderate this year and the next, India would still be one of the fastest growing economies in the world. While it is difficult to exactly gauge the duration and severity of the global recession, the central banks and the governments across the globe are very agile and taking prompt action to minimize the damage.

The Central Bank has also taken several measures to ease the liquidity pressure and fuel growth in the economy. The results of these measures should be visible in the next couple of quarters. This, coupled with some signs of recovery in the US, would be some important triggers for the market to watch out for.

We continue to believe that India’s long-term story is intact and it will grow strongly once this crisis blows over. And we continue to remain bullish on infrastructure sectors like power, construction and capital goods. We are also bullish on domestic consumption players like telecom, retailing and banking. In addition, we believe that any company which has a good business model, visionary management and good growth prospects would perform well.[PAGE BREAK]

While IIP growth has passed its current cyclical peak, it is expected to be moderate this year. The key factors behind this moderation are liquidity crunch, global downturn, currency appreciation as well as the falling commodity prices. Consequently, investment capex in India has been put on hold which will impact IIP growth going forward.

Talking about inflation, it seems to have peaked and is heading for moderation next year. And the key factors behind this moderation are staggering effects of the earlier policy measures, commodity meltdown and the global downturn which is squeezing demand and real incomes of the consumer.

At the same time, the focus of the RBI has shifted from inflation to growth and the impact would be visible in the next few months. Given that commodity prices have fallen significantly from their peaks and over heated sectors like real estate are now cooling off, interest rates seem to have peaked. In case of a downward trend in interest rates the sectors which will be positively impacted are auto, consumer durables, banking, infrastructure and real estate.

We have always maintained that retail investors should invest in equity with a long term perspective only and should never try to time the markets. It is always advisable to follow the systematic investment route and stay invested given the long term growth prospects. It is important not to panic in such turbulent times and continue with the systematic investment strategy irrespective of bull or bear market phases. Over the long term, equity as an asset class tends to outperform.