Markets: Opportunity in disguise!

Source: EM

If you have been waiting on the sidelines to invest in the stock market, then, this is the time to start allocating your money towards equities. But again, it is pertinent to stick to one’s risk-return profile and also take a staggered approach to investing in stocks. Over the next two to three years, we believe that equities can deliver 15% to 20% return per annum. Here is our take on the stock market and the way forward.

First of all, we are not great experts in predicting the level for the index. We also do not predict commodity prices, both of which are not only governed by global demand-supply equation but also investor sentiment. We leave the prediction game to the ‘experts’ and with this as the background, here is what we think investors should do.

Top losers – Last one week
(Rs) 10-May-06 18-May-06 % change 52-week H/L
Sensex 12,612 11,383 -9.8% 12,671 / 6,381
Nifty 3,754 3,397 -9.5% 3,774 / 1,965
Sterlite 587 428 -27.1% 614 / 114
Orchid Chemicals 333 244 -26.7% 400 / 187
MRPL 62 48 -23.6% 64 / 42
Syndicate Bank 101 78 -22.0% 104 / 53
Century Ind 614 484 -21.1% 699 / 241
Jindal Stainless 122 96 -21.1% 165 / 83
Hindalco 239 189 -21.0% 251 / 107
MTNL 217 173 -20.2% 226 / 108
IPCL 294 237 -19.4% 299 / 159
IOB 107 87 -18.7% 133 / 73

A rewind…
The decline in the Indian stock market and for that matter, the stock markets globally, is commonly attributed to the Federal Reserve’s stand on interest rates in the US. While it is difficult to predict when the Fed will stop hiking interest rates (in fact, some economist are very critical of the Federal Reserve’s policy to hike interest rates gradually), we have been firm believers of the fact that it will have an adverse impact on FII inflows into India. And it has, after a long time (after 22 months, started in June 2004). In the recent Fed meeting on May 10th, 2006, the committee highlighted the fact that further policy firming is possible to address inflation risks. The Fed has already raised interest rates 16 times, each time by a quarter of percent. What is impacting global markets is the fact that a further rise in Fed funds rates (in light of the recent inflation data) could impair the pace of global growth, consequently impacting commodity demand. Thus, the downward effect in commodity prices and stocks. Some have even attributed to the recent decline in commodity prices to the selling by hedge funds and not necessarily to a sudden change in the demand-supply equation for commodities.

Top gainers – Last one week
(Rs) 10-May-06 18-May-06 % change 52-week H/L
Adani Export 139 192 37.7% 184 / 48
Hinduja TMT 716 751 4.8% 867 / 297
Finolex Cables 360 376 4.5% 423 / 220
Bombay Dyeing 808 834 3.2% 989 / 260

Take a Pause…
In these volatile, it is pertinent to take a pause and reflect on the fundamentals.

  1. First of all, this is not a ‘bear’ market. It is a correction, which is healthy. However, the extent of volatility and the magnitude of fall in such a short span is not something investors would have anticipated.

  2. The correction does not change the fact that, even now, there are promising investment stories from a long-term perspective. Yes, given the fact that interest rates have risen (both in India and globally), debt is also becoming attractive. In the case of debt, however, we suggest investors to invest in short-term fixed deposits or floating rate funds (to know more about investing in mutual funds, log on to

Fast forward…
Benjamin Graham once said, ‘…in the short term, the market is a ‘voting’ machine whereon countless individuals register choices that are product partly of reason and partly of emotion (consensus). However, in the long-term, the market is a ‘weighing’ machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism (fundamentals).’

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4 Responses to Markets: Opportunity in disguise!

  1. Anonymous says:

    We dont know if this is a correction or starting of the bear market.We see emerging market meltdowns in Indonesia, Turkey, Hungary, Brazil. US economy is heading for crisis we dont know what is in store for us.

  2. hershey says:

    I disagree. US Economy is not heading for a crisis but is in a short-term uncertainity stage. Until the next Fed meeting. There are other factors affecting the US Hurricane season, oil prices etc.

  3. toughiee says:

    I agree with hershey. Crisis has been synonym with US economy since 9/11, but nothing has happened & probably nothing will.I feel in relation to stock market the biggest threat to US & EM will be soaring inflation due to higher oil prices. The problems will arise out of external factors than internal ones.

  4. Anonymous says:

    Hershey & Toughie,What about 65 bn$ trade deficit, will it be financed continously ?Since crisis is avoided from 9/11 does it mean we will never see one ?First, a large (relative to GDP) current account deficit, a large (relative to exports) external debt and a significantly overvalued exchange rate.Second, an asset bubble in the housing sector.Third, a fall in the private savings rate and an increase in the consumption to GDP rate, as well as a boom in real estate investment that are all driven by the housing bubble; these, in turn, lead to a worsening of the current account.Fourth, a credit boom that has fed this asset bubble and that can make their banking system vulnerable to a housing bust.Fifth, a partial cross border financing of the current account deficit via the short-term cross border flows to the banking system that currently is mostly in domestic currency (but that in some cases used to be in foreign currency).Sixth, a relatively low stock of liquid foreign exchange reserves relative to the cross border foreign currency liabilities of the country (the U.S. and advanced economies being an exception as they have little forex reserves but also little foreign currency debt).On top of all these vulnerabilities, – the U.S. also has a large fiscal deficit.Do you think there is no reason to think for a CRISIS ?Navin

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