|
Economy & Finance
Rajaram Ajgaonkar
CA.
Caution is the need
The month of January has
proved turbulent for the major stock markets across the world. The fallout of
subprime mortgage losses in US has refused to die and has been erupting
intermittently. It has caused major holes in the Balance Sheets of major banks
and finance companies around the world. The substantial losses declared by
some of the major players in financial markets have made the world markets
edgy. There was extreme volatility in the stock markets in the 4th week of
January and the markets went down globally. In India, they went down at a
speed hardly seen in the past. The time was so bad that the markets lost
billions of dollars across the world. The volatility still remains and is a
cause of concern. With the profits substantially eroded, the investors are
scared and skeptical. Any further jitter in the US markets can have a major
impact from Tokyo to Vancouver.
There is a debate going on
whether US economy is in recession or is going into a recession. There is no
prediction of a pull-back in the near future. Looking at the turmoil in the
world markets, the FED has taken a drastic decision on January 22 to reduce
the US prime rate by 0.75% at one stroke. Reduction of such a magnitude is
hardly ever done earlier. The rate is further reduced by another 0.5% since.
This has given a major support to the global markets. Probably, without this
stimulant, the markets across the globe would have just melted. There could
have been disasters not only in stock markets; but also in the markets dealing
in currency, metals and commodities. The world and especially the Asian
economies have survived the debacle on the support of FED rate cut; but the
turmoil is far from over. The stock markets across the globe will remain
vulnerable to negative news and also be subject to bear attacks. Investors
need to be cautious in such times.
Indian economy, which was
boasting of resilience to the world economic turmoil, has given away to the
global pressures in the last couple of weeks of January. The signals of US
slowdown pushed the global stock markets southward. They badly affected the
major Asian markets too. Indian market could not protect itself from this
jitter and gave away around 15% from its top level. The fluctuations were
violent and defaults were rampant. However, the brokers managed to survive
this jolt and it prevented a possible further downfall. It seems that the
worst is not over. Stock markets are not able to get strength due to the
negative economic cues and the volatility may be here to stay for a longer
time than expected.
February is the month of
budget and people are expecting a liberal budget, which should please all and
sundry in this election year. If the budget fails to take off, the pace of
Indian economy may slowdown. Though India will grow in 2008-09 at a healthy
rate, it may fall short of the high expectations.
Stock markets
Indian stock markets could
not survive the on slaughter of global meltdown in the second half of January.
In the beginning of January, the Indian stock markets have reached their peaks
and thereafter there was a sharp fall mainly triggered by FII sales. The FIIs
sold heavily because of declaration of huge losses by major banks and finance
companies affected by subprime crisis in the US and resultant economic
turmoil. Though the domestic Financial Institutions and Mutual funds used the
opportunity to accumulate good stocks, the market crashed by about 15% in just
15 days. By all means, this is a major crash. Further there are no clear signs
of immediate revival. The fall was more prominent in the prices of mid-cap and
small-cap stocks and most of them lost more than 25% of their market
capitalization from the peak levels within a very short time. Though there
have not been major financial failures, lots of brokers, traders and investors
are licking their wounds. Investors may not return back to the bourse with the
same vigour. There are good investment opportunities in mid-cap and even large
cap segments. Prudent investors may start gradually buying into fundamentally
strong stocks. Be aware that markets can seek lower levels and so cash is
valuable and desirable. The long term story of Indian economy and so that of
Indian stock market remains intact but there can be fair amount of uncertainty
in the immediate future.
Property market
The Indian property market is
clearly showing signs of weariness. Many of the property markets across the
globe have started losing sentiment over the last one year. The epidemic has
also started showing weakness in the Indian property market especially at
non-prime locations. The prices at places like Gurgaon, Bangalore and smaller
towns have already come down from their recent peaks. Prime properties have
not shown weaknesses; but the quantum of transactions in the segment has
substantially reduced, which is a clear indication of the fact that things are
not rosy. Likely reduction of growth rate, sharp fall of stock market and
reduced confidence in economy are likely to affect the property prices in
India in the near future. It may be the right time for Indian investors to
encash some of their gains in the properties. The new investors need not rush
in. If they are patient, they may get the properties of their choice at a
cheaper rate and on better terms after about six months.
Bullion
The global prices of the
precious metals have firmed substantially over the last couple of months. Gold
had neared the level of Rs. 12,000/-. Though the bullishness in the bullion
market is very evident the investors may book profit between the price levels
of 12000 – 12500. Silver, as usual, is moving in tandem with gold and it will
keep on moving in the same direction of gold. There may be some reaction in
the silver prices over the next few months.
Debt market
The FED has substantially
reduced the US prime rates. To withstand its economic effects, the UK and
Europe will reduce their bank rates. So far, RBI has abstained from reducing
the rate of interest; but if there is a substantial reduction of rates in the
developed world, India will have to follow suit or else face major inflow of
foreign exchange, which can strengthen the rupee further and pressurise
exports.
Fixed deposits and debentures
seem to be good investments for short as well as medium term. Considering the
volatility of the stock market coupled with uncertainty about the near term
behaviour and also looking at the slowdown in the property market, it may be
advisable for an investor to invest at least 60% of his current savings in
debts, debentures, fixed deposit and similar investments. Even the liquid
schemes of the mutual funds should give reasonable returns, at least till end
of March.
Conclusion
When the times are uncertain,
it is better to play safe. There can be better opportunities for those who hold
liquidity during the next few months. |
