The sovereign debt crisis in Europe started with Greece. Although Greece is quite small, considering the size of economy and quantum of debt, fears of the same spreading to other nations made everybody concerned. It started with downgrades for Greece, then Portugal and now Spain. The European Union came out with a trillion dollar package. However, coming out with new debt to fund the existing debt implies a postponement of solving the problem. Some bigger nations like Germany are planning to increase taxes and cut spending so as to reduce the deficit. This also might result in lower growth and ultimately increase the debt.
If the problem aggravates to other European nations, then one should witness outflow of foreign flows from the emerging markets. Indian markets are trading at close to 16 times FY11 Sensex earnings. This is not cheap and any hiccups in the global markets will negatively affect the Indian markets in the medium term. The last quarter results of FY10 have been on expected lines. This was mainly on account of some pick-up in the domestic demand and the lower base of the same period last year. Certain sectors like auto, banking and capital goods continued to give good results while IT, cement and oil & gas were a mixed bag whereas telecom continued to under-perform. At the domestic level, markets would take cues from inflation and the upcoming monsoon season. Inflation, though, seems to be stabilising at the current levels and early signals suggest a near normal monsoon.
At the global level, apart from the rising commodity prices and concerns about the European sovereign debt, the markets would also be looking at the overheating Chinese economy and the effect of monetary tightening by them. We believe that India’s long-term growth story will remain strong and positive. The GDP for FY11 is expected to be in the range of 8-8.5 per cent and over a longer period the growth is expected to be in this range. Thus, we like sectors which would be contributing to this growth and are core to the economy. Over a medium-term phase, we are in favour of domestic consumption themes like automobiles. Over a long-term period, we prefer banking, capital goods and engineering. We would also like to select stocks in IT and oil & gas.
With regards to equities, the valuations are not cheap and this coupled with global uncertainties would make the markets vulnerable in the shortterm. The Indian markets have given around 80 per cent returns last year and some of the sectors have given twice those returns. It would be advisable to avoid some of those sectors with high beta and continue to focus on sectors where we stand bullish from a long-term point of view. In a volatile market, selecting a particular asset class becomes difficult. Retail investors can opt for hybrid plans which have a mix of both debt and equity. They should preferably opt for a SIP (systematic investment plan). The real advantage comes when continued over a long period of time as it avoids the need of timing the market.