Wednesday, August 10, 2011


Well the last few days have been extremely volatile and the volatility has been sharp enough to scare most of the retail participants. And the big question now is, whether the time to buy Indian equities is now, or should one wait further?

Now, US markets had a big rally overnight, after the Fed said that the near zero rate scenario will continue till at least mid-2013. That’s 2 years from now!! It just shows the desperate state Fed is in and unlike the RBI; the Fed will do what markets want it to do. The key to gauging the next move for market is to identify whether the texture of the market will be Sell on rally or bottom fishing.

Now, all of us need to understand one point, while day-to-day moves are something nobody can predict, it will be foolish to just conclude a perfect correlation between Dow and Sensex for a medium to long term as has been proved time and again over the last 5 years and something that will be proved again over the next 5 years. So with that in mind, anyone making an investment decision (not a trading decision) has to keep India’s own fundamentals in mind and that’s been the biggest reason for India’s underperformance this year, even before the global mayhem began.

The biggest game changer for Indian market has been the hawkish stance taken by the RBI which is somewhat justified by the high and sticky inflation. Now the 2 big factors for this high inflation have been high commodity prices, crude in particular and very high food inflation, driven by supply constraints, a buoyant economy and to some extent, the rampant corruption.

Now the food inflation is unlikely to come down to comfort zone soon, that’s a new reality that we have to live with. India’s economy remains strong, the middle class is getting richer and the demand for good quality food far exceeds supply and unless we attack the supply side constraints and have another food revolution, this inflation will remain sticky.

As far as oil is concerned, while all of us want to see it come down and fundamentally it should come down considering the kind of demand-supply scenario, unfortunately that may not be the case. You may continue to see massive corrections like the one witnessed earlier this week but it’s dangerous to assume a total collapse of crude and that’s what I mean by the title of my article. The simple fact is the Fed will have to come out with QE3. Having kept markets on a ventilator for so long, it can’t withdraw that when ostensibly the patient is in worse condition than it was at the beginning of QE2.

And with QE3, you will again see a lot of froth in speculative assets led by liquidity, crude included, may be even emerging markets including Indian gaining a slice of that. And while for the short-term that will result in great trading gains, you will always feel uncomfortable at the pit of your stomach about the next phase for equities. The best scenario from an Indian perspective will be if Fed comes out, takes a firm stand and says, there will be no QE3 as that will serve nobody and that the economy has to revive on its own even if it means 2-3 quarters of pain. That would mean a collapse or topping out of crude/commodities and the beginning of a healthier bull market in India.

The one asset class which has been outperforming everything else is gold and in there lies a lesson for times like these. In a time where governments and central banks keep printing money unabated, the world will look for a new currency, one which cannot be printed, which is limited and which is valued and there is absolutely no doubt that gold represents that.

For an average retail investor, the time to bottom fish may not have come. Please don’t be under an illusion that just because a stock has fallen 50%, it represents value. As 2008 taught us, a stock can fall 50% after falling 50% and then another 50%. So unless you have a 5-10 year view, where you buy fundamentally strong stocks and don’t let the fluctuations affect you, this may not be the best time for you and chances are you will get better prices. Just keep your shopping list ready though.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.

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