Adopt a long-term investment approach

The Sensex ended in August 2008 at 14565 gaining just 209 points (1.5 per cent) over the July close of 14356. The initial rally to cross the 15000 mark faltered on the subsequent weaker GDP growth forecast and inflation hovering close to 13 per cent. The market almost consistently fell except on the last day when it gained 516 points. FIIs and Mutual Funds again turned net sellers of equities while favouring investment in debt instruments. Prevailing higher interest rates are taking these institutional investors away from equities because the macro environment is too hazy to support upward bias in equities.

In addition to the subdued economic scenario, the political situation and the nuclear deal are on shaky ground. Further, floods are wreaking havoc causing agricultural output to suffer. The positive sentiment required for investment is thus lacking.

The cumulative seasonal rainfall for the country in August is below the Long Period Average value by only 2 %. The June-September monsoon, which accounts for four-fifth of the nation’s annual rainfall should help the country’s 234 million farmers harvest a bigger crop and boost rural incomes. Going forward, agriculture will hold the key for both industry and overall growth, and also for taming inflation levels.

On the positive side, crude oil prices cooled off from US$150 to around US$110 mainly due to dwindling demand. However, there are contrary views about the trend that might prevail for prices of commodities including crude oil over the short to medium term.

The RBI is hiking interest rates to reign in inflation. Both higher interest rates and inflation bother the industry as they impact consumer demand and hurt corporate profitability. Until we see inflation easing, it would be unrealistic to expect easing of the monetary policy. Higher interest rates and inflation levels might to some extent delay expansion projects of corporates. With general elections scheduled for early 2009, more populist measures are expected to keep economic considerations at bay. Further, the US$17billion (Rs.68,000 crore) farm loan waiver and 21 percent increase in salaries paid to about 5 million government employees should certainly spur consumer demand in the ensuing festive season.

Consequently, in a not very congenial macro environment, it is suggested that emphasis be put on getting into stocks of well-run companies having reputed promoters and proven management. invest in the underlying businesses of the companies since the stock market will eventually appropriately value the business. If the business does well, the stock eventually follows. So, by adopting a long-term approach to investment, you emerge a winner regardless of short-term blips.