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.

Sensex poised for volatile trading

Rising anxiety about the health of the global economy will cast a long shadow on Indian shares this week, while falling oil prices are unlikely to provide much comfort to nervous investors who have been grappling with volatile markets.

Although inflation has eased for two weeks in a row, it remains near 16-year highs and the new Reserve Bank of India governor, D. Subbarao, who took over on Friday has said his priority was calming price pressures.

"There are too many dark clouds hanging over the market," said stocks trader Rasesh Shah. "It will be tough going with the headwinds picking up."

Worsening prospects for the US and European economies, combined with a slowdown in China, India and Brazil, are expected to lead to a global contraction and put immense pressure on corporate earnings across the board, he said.


Information technology companies like Tata Consultancy, Infosys, Wipro and Satyam which rely on the US for most of their business could be hurt if the world's largest economy slips into a full blown recession.

Shah said the gloomy business outlook had pushed the stocks of these companies sharply lower last week, even though a weakening rupee was a big positive for the export-dependent companies.

Commodity firms will also face the heat as shrinking growth in China douse demand and pile downward pressure on prices.

Goldman Sachs last week downgraded US steel stocks to 'neutral' from 'attractive' and lowered its price forecast for the metal in the next 16 months because of slowing economic growth in China and a strengthening dollar.

Steel prices are likely to average $923 a tonne this year and $951 next year, Goldman said, 3.2 per cent and 6.1 per cent less than it previously forecast.

This will have an impact on Tata Steel, the world's sixth-largest steel producer, which now gets the bulk of its earnings from its Corus unit in Europe. Its domestic operation along with rivals Steel Authority of India and JSW Steel have been facing pressure from a government-engineered price freeze since May.

The benchmark Sensex index, which slipped 0.6 per cent last week to 14,483.83 last week, could see a slide in the near term as investors turn risk averse.

Grim forecast

Lehman Brothers said in a report released on Friday the Sensex could drop 10-15 per cent in the short term to 12,500-13,000 and forecast borrowing costs to remain high in the next three to six months.

However, the US research house said the fall should be used as an opportunity in the coming year to accumulate shares. Corporate earnings have been affected by higher interest rates, rising raw material costs and high yields, but margins are likely to stabilise in coming quarters in a deflationary commodity environment, it said.

Investor should consider buying shares in banks and in auto, media, consumer, telecom, real estate and pharma companies, but avoid capital goods, non-ferrous metals and cement companies, Lehman said.

Equity strategist V. Venugopal said it was too early to suggest inflation had lost momentum and the Reserve Bank of India (RBI) was more likely to raise interest rates again in October, when the central bank is scheduled to review policy.


Annual inflation in the week ended August 23 was at 12.34 per cent, edging down from 12.63 per cent two weeks earlier, but well above the RBI's target of seven per cent.

Venugopal said a sliding rupee and an Organisation of Petroleum Exporting Countries (Opec) meeting this week would be closely watched.

The rupee, which has tumbled nearly 12 per cent this year to a 21-month-low of 44.7 per dollar, could weaken beyond 45 this week, he said, as refiners step up dollar purchases to buy oil.

The currency has been under pressure after India's trade deficit jumped to a monthly record of $10.8 billion in July, with oil imports soaring 69.3 per cent to $9.48 billion. The gap stood at $41.23 billion in April-July, sharply up from $27.35 billion in the year-earlier period.

The Opec meeting in Vienna this week could announce a cut in crude output to halt tumbling prices of oil - down eight per cent last week to below $107 a barrel from a recover over $147 in mid-July.