Cautious optimism in the long-term

The Sensex fell 7% further by 695 points to close at 9,093 on November 28th, 2008 as compared to 9,788 on October 2008 end. The focussed measures taken by the RBI to calm the credit markets along with complementary steps taken by SEBI has finally started showing positive signals in the market. However, the FIIs continued their redemption induced sales putting pressure on the market.

GDP growth has slowed to 7.8% in the first half (April-September) of this fiscal year, which in itself is the highest in the world today after China. However, the recession in several major economies could lead to difficult times for India even though India is in a relatively better position to weather it.

Global rating agency Standard & Poor’s stated that the terrorist attacks in Mumbai were an isolated case and that it does not expect any negative implications on India’s macro economic activities or government’s fiscal position from the attacks. The act will have limited impact on markets. Mainly hospitality, travel and tourism and aviation segments could be affected. The terrorist attack is unlikely to increase India’s geopolitical risk perception such that it can adversely impact India as a growing outsourcing base of goods and services.

Although prospects for corporate results for the quarter ending December 2008 appear grim, things could begin to look up from the January-March 2009 quarter and thereafter, once the liquidity situation improves significantly. Valuations have now come down to appealing levels with Indian markets no longer expensive on an absolute basis. The country’s long-term strength continues to lie in the quality of its entrepreneurs.

While economic news might remain stable to negative in the early part of 2009, markets typically bottom ahead of the economy and earnings bottoming out due to the lead lag nature of the stock market and economy. Easing liquidity, interest rates and lower inflation could be drivers for better market performance in the second half of 2009. A downturn is a precursor to an upturn. A great majority of people across the world are still employed and eventually, with proper proactive fiscal and monetary measures being taken by all the nations in a co-ordinated manner, economic structures will become more stable and strong.

In the downward fall of the market, some scrips have been battered by urgent sellers and these now discount their underlying fair value. For such scrips, the downward risk is limited, while the upside potential is quite phenomenal. No one enjoys a sharp market downturn as at present with economic dislocation, growing panic, mark-to-market losses and other such adversities. Successful investing always requires a long-term perspective and this has never been truer than at this moment in time.

Once the market stabilizes, investors will start rationalizing between good and bad companies. Good quality businesses managed by quality management will be the theme in the coming days. Hence, we are reasonably optimistic about the long-term prospects of such companies.