Be A Long Distance Runner

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The biggest dilemma facing an investor today is whether the dream run in the market will continue in the remaining months of 2010. We can expect the markets to give reasonable returns during the balance period of this year on the back of noteworthy domestic economic data, decent financial performance of the companies, strong interest shown by the foreign investors in the Indian markets, and fair valuations. Also, barring a few aberrations like the outcome of the Babri Masjid verdict, the fracases linked to the Commonwealth Games, and land acquisition laws – there continues to exist a comfortable political situation.

In the short term, global economic developments will act as the major factor to decide the course of the markets. Certain macro-economic factors such as the manufacturing data, employment numbers, US housing data, etc. will decide the short-term movements. Domestically, the September quarter results which will start coming out from the second week of October will also be watched closely. And last but not the least, the monetary policies of the central banks the world over will also play a key role in the near term as the management of exchange rate will be an important driver of the economic revival of those countries that possess limited scope to boost domestic consumption and will need to depend on exports to fast-growing emerging nations.

The volatility in the markets may consequently increase and hence the intermittent rise and fall in the equity markets should be overlooked while additional attention should be paid to the broader direction, which should be on a secular uptrend. The excessive preoccupation with the short-term behavior of the market has kept a large majority of domestic participation away. The next challenge then is to study the sectors you may wish to bet on and the reasons for doing so. Some of the sectors that look the most promising are:

• Software on account of the strong business momentum and reasonable valuations
• Infrastructure-related sectors such as construction and capital goods on the back of the government spending on infrastructure development
• Cement on account of the strong monsoon which is expected to fuel the rural economy and thereby pave the way for strong demand after this season is over
• Domestic consumption-driven sectors such as auto and FMCG

Retail investors should invest in equities with at least a two-year view to obtain decent returns since the markets might turn volatile in the near term. If you want to overcome the apprehension of a volatile market, you may choose a daily investment plan (DIP) or a monthly SIP route of investing. Given the complexity of the market cycles and the dynamics of the various sectors, if one doesn’t have the resources to track his/her individual portfolio closely the core investment should be in mutual funds and direct investment in equity should be limited to a few stocks that he/she can keep an eye on efficiently.