The so-called politically correct budget has not pumped in
any energy in the Indian economy. The signs of slowdown which were in the air
are becoming more and more prominently visible. The data from US is far from
encouraging. The substantial reduction of prime interest rate in US has caused
a temporary flutter in the financial markets but its effect may not last long.
It is very likely that the US is already in a recession and there are no signs
of it bottoming out. There are predictions that things will improve in 2009
but they may be just speculations. There is no concrete evidence to support
the predictions. Europe is currently trying to show a brave face but further
slowdown in the European economies is very likely to occur in the next six
months. When US slows down it certainly impacts Europe.
Asia is showing some resilience, especially due to
expansion of trade within the region. However the desired cooling of the
Chinese economy will definitely affect the overall growth of Asia. The growth
numbers will remain much higher than US and Europe but they are likely to be
lower than the last year’s numbers. Middle East had been booming at the back
of very high oil prices. It shall continue to do so in the near future as the
oil prices are not expected to come down much in the short run. However
consumption of Middle East has a very small base and so it has limited impact
on global economic numbers. In 2008, the world economy will grow but the pace
of its growth has already decelerated. The year is definitely going to be
tougher than the last year. We can only pray that 2009 will show improvement
over 2008.
The world has experienced hyper growth in the last four
years, which was to an extent unprecedented. During that period, most of the
economic parameters all across the globe showed robust growth. The prices of
everything escalated but the growth of income kept pace with inflation numbers
and even surpassed the same for a large number of people, creating a positive
atmosphere. This dream run was to end. It lasted for a fairly long time. On
the back of sub-prime crisis in US, the world markets started cooling off
causing uncertainties and apprehensions. Over the period of six months, the
apprehensions turned into realities thereby making financial institutions
suffer huge losses. It eroded the confidence of investors, which caused crisis
of liquidity in many cases. The uncertainty resulted in intermittent bouts of
panic and the share markets across the globe lost heavily. The investors’
wealth eroded within a short time and the confidence took a tumble. It is
likely to take time to repair the damaged sentiment, which is so crucial for
the growth of an economy.
During the last few months, Indian politicians and experts
kept on harping on the resilience of Indian economy to the major economic
events in the world. We were told that the winds of recession blowing mainly
in US and Europe may not affect India much. Now we feel that this was not
fully true. Over the last few years, the major economies of the world have
substantially integrated and have started affecting each other as never
before. The inter-dependence of the economies has grown and will grow further
in the light of reduced barriers for the movement of goods and services across
the world. In the later half of January, the Indian stock markets got a sudden
jerk, which resulted in panic. Though the economy recovered from the panic, a
slowdown emerged from the event and the reversal of the same is not visible
till date. We have been hearing bullish statements on Indian growth prospects
for the Financial Year 2008-09. They are simply better numbers as compared to
many other countries. Still it is an admitted fact that India will grow at a
slower pace in 2008 as compared to 2007. Though Finance Ministry is showing
confidence about the growth rate of 8% for financial year 2008-2009, I will
not be surprised if the number gets revised to around 7% by the fourth quarter
of the year. Inflation is revving up in spite of major subsidisation of the
petroleum products. Due to high inflation, it is risky to reduce interest
rates. High interest rates will also cause a greater slowdown in economic
activities. This being the year of the national elections, the ruling party is
likely to do its best to control the inflation and in the process, the
economic growth can suffer. Though the long-term story of India remains
intact, there can be sufferings due to slow growth, high inflation and
unemployment. It will be wise for investors to become more conservative and
more selective as compared to the last couple of years. The time for making
fast money may be over. Investors will have to work hard to net gains. Riding
on volatility can create more risk and greater probability of making losses
than gains.
It may be the right time for investors to invest in fixed
deposits and debt or liquid schemes mutual funds. Fixed maturity plan can as
well be a good option. Though the interest rates are not very great as
compared to what we have seen in some earlier years, they are still better
than those in many other countries in the world. The Indian currency is much
more stable now. Over the next one year, the rates of interest are not likely
to go up in India due to the efforts to control inflation. The rates will go
down only if inflation can get controlled. Today, it is safe to invest in good
quality fixed deposits. Fixed maturity plans of mutual funds are likely to
earn steady returns over the next couple of years. At least for now, investors
can do major allocation of their savings in these investments. The bonds and
debentures may be avoided for the time being as the bond yields may come down
in the near future due to efforts of the Government to control the inflation.
Though the stock markets have collapsed, the time may not be fully ripe to
aggressively invest in equity.
On the back of global subprime turmoil and global equity
crisis, the commodity prices have rocketed due to new found fancy of the high
net worth and institutional investors. I consider this as temporary phenomena
and investors should not dabble in commodities unless they have expert
knowledge about the subject. Commodity markets need a deep study, as there is
a large downside risk.
High prices of food have emerged as a major cause of
concern for the people across the globe. Due to high petroleum prices, many
developed countries and even developing countries diverted their land towards
cultivation of crops which can be converted into bio-fuel. This has affected
global production of food grains and other products needed for the consumption
of human beings and animals which also contribute to food for human
consumption. The shortfall in food production has resulted in shortage of food
pushing up the price of food items. Further, global warming and abrupt climate
changes caused by greenhouse effect has resulted in less food grain production
in many countries. The shortage is becoming a major cause of concern not only
for a few countries but for the whole world. High petroleum prices and global
warming are not easy phenomena to correct. Unless there is an increase in
acreage under food cultivation or improvement of farm productivity, the world
is likely to have greater food shortage resulting in high food prices. This
will cause increase in primary inflation in most of the countries in the
world, which can be more serious in underdeveloped and developing countries. I
feel that this is a global challenge and the whole world will have to take
cognizance of the same. Corrective steps are very much needed in the immediate
future.
Stock prices of many reputed companies are looking
attractive as they are hammered down, but there is no guarantee of immediate
improvement. In the last month, I have advised to buy stocks below the Sensex
level of 16000. Now it may be advisable to add on some good quality stocks to
your portfolio below the Sensex level of 15000. It is worthwhile to book
profits at 17000 levels and above. Though a lot depends on the results to be
declared in the last quarter of financial year 2007-08, the growth prospects
of India are not as rosy as they are assumed to be and there can be negative
surprises coming locally or even globally. Markets are likely to be range
bound for the next few months to come.
Gold has shed some of its recent gains in the last few
days. Though it is still going strong, I am not very bullish on it over a
medium term. There can be an upside of Rs. 1,000/- in the month of May and it
can be used by the investors as an opportunity to book profits. Investors can
purchase gold below the level of Rs. 10,500/-. Silver moves in tandem with
gold and currently I am not very bullish on silver as a commodity.
Times are tough but opportunities do exist. Investors are
advised to be cautious and selective. Conservatism is the desired policy, at
least for the time being.
