Good Times Will Return

[INSERT_1]

As of now, it is difficult to predict the market as there are varying factors that come into play while influencing market movement. However, we expect the markets to continue to remain range-bound over the short term. In the long term, the Indian equity market is expected to demonstrate strength and resilience on the back of triggers such as domestic consumption,  increasing rural demand and other demographic advantages. All support levels have been breached and at current levels the valuations are extremely attractive. The current scenario is due to the de-leveraging of certain investors who were invested for the short term and not a function of the valuation of the market or the long term fundamentals.

With oil prices correcting significantly, inflation showing signs of sharp correction and the downward trend in commodity prices, the growth outlook for India, though moderated, is expected to be much higher than other economies. The financial crisis in the world is under control due to various monetary and fiscal initiatives undertaken by regulators, governments and central banks across the world. Various initiatives across economies such as infusion of capital, support to money market funds, re-evaluation of accounting norms, and other such fundamental measures will help manage the current financial crisis.

The growth potential of many of the developed countries is much lower than witnessed in the last 10 years. However, lower interest rates are likely to ensure that recessionary conditions will settle down in the medium term. In India, the big impact of the crisis has been the downward trend incommodity prices that has brought down inflation. This is expected to provide the necessary triggers to the market in the future. Sectors that are export-oriented such as software have witnessed unfavourable impact since the principal business is linked to the US economy.

While market behaviour over the short term is difficult to predict, the belief is that the combination of lower prices and lower interest rates is likely to be extremely positive for the economy and the market through a triggering of demand and improvement in the credit scenario, thereby stimulating growth. Sectors and companies that are fundamentally strong have good growth prospects and those that do not have significant funding requirements are expected to outperform in the near term. Even a sector like FMCG is expected to do well on account of triggers like the Sixth Pay Commission, etc that will translate into higher disposable income. And investing in good companies that are fundamentally strong in the infrastructure space with a long term view will provide good return potential.

As of now, all the segments of the market are undervalued and provide good investment opportunities. With the market correction pushing many large-cap companies towards attractive valuations coupled with the advantage of them being more resilient to volatility and having a better track record, large-cap focused funds will help capture the upside. The results over the next two quarters are expected to demonstrate low growth due to the onetime inventory losses in many companies on account of a sharp fall in commodity prices. The current market seems to have adequately discounted this. However, the long-term outlook for the second half of 2009 appears to be reasonably good due to a combination of lower prices and expected lower interest rates.

With oil and commodity prices correcting sharply, inflation is also expected to correct sharply. The recent inflation level at around 8.9 per cent is evidence to the fact. We expect inflation to remain at the lower end as long as commodity prices continue to show a downward bias. In the current scenario of global liquidity tightening, the RBI has taken initiatives towards improving liquidity and has been consecutively reducing CRR so as to infuse liquidity in the system. We recommend investors to take a cue from the possible future upside and invest in mutual funds with a long term view there by facilitating participation in the long term India growth story. Investors should invest in large-cap funds like ICICI Prudential Dynamic with strong track record and ability to provide risk adjusted returns.