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On This Day - 4 OCTOBER 2012
'The Sensex may not make a new high this year'
In this issue:
Recently we wrote to you about all the excitement surrounding Sensex 23,000.
In connection with that, here's a warning -
If you do not pick your stocks well, no matter how well the Sensex does, you may not make money at all. In fact, you could even lose money.
You see, in the long term all that matters is the quality of stocks you own.
And that's precisely why you should see this short video right now...
In it we reveal details of what in our view are the Top 5 Stocks to own in current times.
Faber's pessimism though had less to do with policies adopted by India and more with the global economic environment. He was very critical of central banks in the US and Europe that are pursuing expansionary policies in terms of monetary and fiscal stimulation. And this has led to not real economic growth but asset price inflation across the globe. What more, these policies are also causing the cost of living to rise in many countries, including India. And when this happens, savings take a beating which in turn impacts investments and ultimately, the long term economic growth.
All of this does not mean that India as an economy will stop growing. It certainly will but thanks to the spectre of imported inflation and also of the domestic kind, brought about by policies of the Government, the growth may slow down a bit. Thus, it is imperative for investors to keep their expectations well grounded. Especially in current times when sentiments are quite buoyant all around.
Having said that, the golden rules of investing should not be ditched. Invest in fundamentally strong companies run by capable management team and ensure that you have a margin of safety in valuations. And irrespective of whether Sensex makes a new high this year or not, your long term performance will certainly shine through we believe.
So, what does the central bank have to say on the issue? Well, the RBI deputy governor Dr Gokarn recently voiced his support for FDI in retail. And the logic behind his affirmation to the foreign direct investment is sound enough. Dr Gokarn explained the vicious cycle of food inflation. If food prices keep growing it impacts wages. Higher wages impacts expectations and in turn feeds into the inflationary process. Thus, nipping the problem in its bud through more efficient logistics is the only long term solution. The RBI has been trying its best to rein in inflation for more than two years now. Several rounds of interest rate tightening were effected to help curb liquidity. Until growth and capital investment took a big hit and forced the RBI to go easy on liquidity management. Having said that, the central bank continues to watch inflation, particularly that of food from close quarters.
Let us explain. The US Fed's open ended bond buying program, popularly known as QE3, is nothing but a colossal experiment. What is the basis of this financial experiment? By buying securities from the open market, the Fed aims to suppress mortgage rates. With interest rates near zero, investors would be forced to buy riskier financial assets. This in turn would push prices of houses and equities higher. No wonder the US stock markets alone gained about US$ 400 bn following the announcement of QE3. The Fed hopes that this will revive sentiment and boost consumption and investments. And this will probably translate into higher growth and higher employment.
On the flipside, if this experiment worth billions of dollars fails, it is going to have massive long term repercussions. It would push inflation higher. Income inequality would rise sharply. The standard of living would decline. The repercussions of the failed experiments would have to be borne by future generations. In our view, this experiment is way too risky and the chances that it succeeds are poor.
But the opposition does not share the enthusiasm of the ruling party. As a result, one could expect the parliament houses to just go into yet another adjourned session. To avoid this, the government has tried to get India Inc to try and persuade the opposition leaders to agree on the reforms. Given that India Inc has been pro-reforms for quite some time, they may play along to help the government. It remains to be seen as to who wins at the end. Would it be the victory of reforms? Or another uproar in the Parliament?
The overall industry supply and demand gap is expected to widen given that a handful of foreign hotel majors are setting up or expanding their properties in the country. Given this scenario, hotel stocks have underperformed the broader markets substantially over the last year. However, companies have been taking steps to keep their debt levels under control. Some of which include selling their stake in properties and restructuring repayment plans. In fact, hotel stocks saw a sharp spurt in the past few days as companies announced plans of raising stake (including conversion of warrants) as well as rights issue by associates.
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