Investors Should Play Safe In These Uncertain Times

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Market has now changed from fundamental phase to psychological phase.The fear factor is now dominating the market. When people are fearful, they prefer to be safe rather than sorry. Therefore, they are even selling their most valued assets at distress prices. Everybody seems clueless about how long this will continue. It is no more country-specific problem which can be solved easily, it is global in nature. Recent rally in the market is the result of coordinated efforts initiated by the government. These efforts have addressed two factors. First part is the fear about lack of liquidity in the system which has been addressed by pumping liquidity into the system. The second factor is the lack of confidence. Investors have lost confidence in the economy in general and banks in particular. The circulation of money will help the banks and economy to keep its wheels rolling. It is very difficult to predict the sustainability of the market because FIIs are selling their investments not because they have lost confidence in the Indian economy but due to pressures arising out of redemptions or winding up of funds, etc.

Today, the relative valuation of India Inc. looks more attractive, but this attractiveness needs to be looked against the backdrop of performance of corporates. Even if they continue to perform at this level, it is sustainable, but as of now everything looks uncertain. Money is fungible and investors put money where they get maximum returns at a given level of risk. In these uncertain times, it is difficult to assess the risk in the Indian market. One year down the line, when things will have more clarity, the market will have clear direction and government policies initiated for feel-good factor for voters after election, will paint a clear picture of risk and reward for the companies. It is hard to predict the Sensex level one year down the line and it will merely be speculation. But one thing is sure that the downside from this level is largely capped and at some level the money will start pouring in. Perception of the people will change and they will start buying. The sector which will revive fast is the financial sector as it acts as a lubricant for other sectors to perform.

The triggers that will revive the sentiments of the market will come from government spending on infrastructure. Steel and cement being the key component for development of infrastructure will stimulate the demand. Power being other important part of infrastructure needs to be improved to execute the orders. Everything will focus on manufacturing and thereafter the focus will be on services sector. The effect of this slowdown will be more visible in Q4FY09 because long-term contracts cannot be pulled out suddenly. Moreover, corporates did some structural mistake in CY07 by borrowing less in the expectation that they will hit the capital market at high premium, but with the market tumbling, they are stuck up and are paying the price of their mistake.

I would advise retail investors to enter the stock market through mutual funds. Investing in stock market requires certain amount of discipline which is lacking in retail investors at large. Moreover, investing through mutual fund gives more power in the hands of mutual funds, who can demand better performance from the companies. In these uncertain times, investors should play safe. Opportunities will again come knocking, but investment discipline has to be maintained.