Sensex@20K: Should you spend, invest or save?

Two years after Lehman Brothers went bankrupt, the investment bank is back on its feet again. In these two years though, much has happened that has brought some of the biggest economies in the world, including the mighty USA, down on their knees.

India, in the meantime, has gone from strength to strength. On September 21, the Sensex breached the 20,000 mark for the first time since January 2008. The economy is booming at a stupendous 8.5% of GDP. But while there’s a sense of jubilation all around, the common man is in a quandary about how to use his money well? Should he spend, invest or save? Is it the beginning of another bull-run or is it time to make the moolah and stay put?

Roopa Purushothaman, head of research at Everstone Capital, who co-authored the famous BRICS report of 2003, says, “In the short term, 8-8.5% growth is expected. In the long term, it will be close to 7%, which will be driven by India’s demographics and also by the fact that India needs to catch up as its income per capita is lower compared with other BRIC nations.” She says that all engines of the economy are firing, but longer-term labour reform and progress in education indicators will be crucial to sustainable growth. If not, this will be a delicate and shorter-lived boom cycle.

“We are going to see favourable consumption dynamics over the next two years and even longer over the next ten years. This is because the baby boomer generation is now getting into the workforce and because of this, different sectors will start to do well,” she adds. A Religare India Economics report too is optimistic about GDP getting closer to the 9% mark. ”With domestic growth drivers firmly in place and fiscal year 2011 growth estimates at 8.5%, our preliminary estimate for fiscal year 2012 stands at 8.9%. The Indian economy is surely ‘making haste slowly’ towards the 9% mark,” it says.

So go out and make the best of this boom time, says Shankar Sharma, global trading strategist at First Global. “If you really want to get rich, think of an innovative idea. Over the next twenty years, India will see many of these innovative ideas turning into big companies. This is the best way to become super rich. If something doesn’t go terrible wrong, one can cash out or go public to make good money.” If you play with the stock market, you will either be just moderately rich or bankrupt. on Saturday, the real economy offers more opportunities than the stock market does, he adds.

Economists say there is reasonable visibility for most people about their jobs and career growth. So, it is a good time for some spending as well. Saumitra Chaudhuri, member of the Economic Advisory Council to the Prime Minister and member, Planning Commission says that the growth of the GDP at 8.5% is favourable.

The industrial output figures have been as expected. Investor sentiment seems to have started to pick up now. “High inflation was a problem last year but various measures have been taken to curb it. Now, food price inflation has turned a corner and the monsoon too has been good. As far as manufactured goods are concerned, we expect it to turn the corner in the next couple of months.”

In the medium term, the Reserve Bank of India will be the arbiter of growth. If it further tightens credit and pushes interest rates up, growth will be hit. “In the short term though, I sense the vibrations of a growth momentum on Saturday. We expect the economy to sail past the 8.5% mark this year,” says Dr Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

A word of caution though. In the medium to long term, the growth rates are going to depend on how much further infrastructure India can create. Sustaining 8.5-9% growth without creating proper infrastructure would be difficult. Reforms regarding land acquisition and labour regulations still remain on the table and need to be addressed. “Political scenario is a serious cause of concern,” says Bajaj Auto chairman Rahul Bajaj.

That said, a few analysts and experts are not so euphoric about the Sensex crossing 20,000. “I’m certainly not euphoric. With India being one of the few bright spots growthwise across the world, the influx of portfolio flows was expected—and these are the key drivers of our stock markets.

But these are fickle flows, here on Saturday, there tomorrow... and I am, to be honest, a bit worried about the instability that they tend to generate... in asset markets, real estate and in exchange rates. I’m sure the RBI is watching this fairly closely,” says Dr Veena Mishra, senior economist, office of strategy management at auto maker Mahindra & Mahindra.

“Year 2008 still remains very fresh in people’s mind and no body is really celebrating. Retail investors have really not made much money in this up move,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.

“I am afraid that interest rates may rise in the near term. I am apprehensive that this could make exciting projects unviable, sadly so,” adds Mr Mitra.

An article from Economic Times