The economic scare coming out of the US is taking its toll on stock markets world wide. The Indian stock markets have cracked because of this global scare along with domestic issues of inflation and slow down in corporate earnings. This has led to a fall of 25-50 per cent of stock prices.
There are signs of a slowdown in economy with GDP targets being revised downwards from 9.5 to 7 percent for 2008 and the risk appetite of stock investors has nearly vanished.
Who can blame the retail investors? They have suffered the brunt of this slide in share market. Investors are still concerned about whether there is still more pain left, or the worst is over. It takes a lot of courage to invest in stocks in a falling market. Even on days when the Sensex and Nifty show a bit of green the mid cap and small cap stocks stay deep in red and the market breadth stays negative. This does not do much to boost the confidence of small investors.
Let’s take a closer look at the India growth story. Is there any hope?
Domestic consumption
India needs to prove to the world that its economy is largely decoupled from the global economy with a conviction that India’s domestic consumption will continue to drive its growth. In spite of a slowdown in the US, there is little possibility of the Indian economic growth being impacted drastically.
First, Indian economy is driven strongly by the domestic consumption boom. Since a large part of the contribution to the GDP is derived from services, which continues to grow consistently, the overall growth will remain buoyant. Once this becomes evident the foreign investors will once again start pouring money to buy Indian stocks. This will also boost the confidence of the Indian retail and institutional investor.
According to Andrew Holland, managing director – strategic risk group, DSP Merrill Lynch,” Even though the short-term outlook may be uncertain, the long-term outlook for India is positive. In FY09, India’s economic growth is likely to remain between 8-9 per cent,”
Where are the Valuations?
With the wholesale erosion in valuations, investors are facing a dichotomy of attractive stock buying opportunities against the fear of stock prices falling below these levels. On the one hand, the economy is likely to continue growing at over 8 per cent while on the other hand, there are fears of a slowdown in corporate earnings; capital expansion plans being postponed, rising cost pressures and risks from foreign exchange exposure of companies. I believe that for a long term investor the stock market is presenting an opportunity to invest.
what are the concerns?
Availability of money (Liquidity) is the major concern. The rising inflation has forced the RBI to tighten its monetary policy further and analysts do not rule out further rate hikes.
Besides, smaller and mid-sized businesses are expected to face more difficulty in raising funds for expansion plans, as credit flows may remain limited to larger companies due to a conservative approach and higher risk premiums.
The restrictions, imposed earlier, for raising funds via the ECB route has only added to the woes. On the industry front, mid-sized and small corporates could get impacted. Larger companies are likely to have better risk management systems in place.
Pick and choose
It is not advisable to time the market. Even the best of financial wizards can not time the stock market or predict the bottom of a down turn. There is valuation emerging in many stocks.
It is true that prices might dip even lower from here but you might not be able to muster up the courage to buy even at those levels. A sane idea is to start investing gradually in stocks which you |
