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Markets: Its investing time!

May 19, 2006

The BSE-Sensex crashed 826 points in a single session yesterday! So, is this a time for investors to panic? Not at all! In fact, these are the times that distinguish long-term investors from traders. While the latter need to worry about their margin money and mark-to-market losses, the former need not panic if they have exposure to fundamentally strong companies. Further, they could also look out for long term 'value buys' at such times.Investors who are well updated with our view on the markets need to view this 'crash' as a 'correction', as this was well anticipated given our cautious stance on the following factors:

  • Fed rates and commodity prices: The US Federal Reserve's guidance about possible continuation of the rate hike campaign beyond the current 5% level, to curb inflationary pressures, is likely to turn the risk-reward ratio in favour of the US treasuries. In effect of this, Foreign Institutional Investors (FIIs) may choose to move their allocation from high risk emerging market equities to safer US treasuries. The attempt to raise rates further, as is believed by one and many, may have a negative impact on the global economic growth. This may consequently trigger a meltdown in commodity prices, something that we have been witness to in the past few days. Any slowdown in the US economy can have a cascading effect on the economies that are heavily reliant on exports to the US.

  • Lower credit offtake: High interest rates in the overseas markets could also lead to a balancing effect on the Indian G-Sec yields (currently 7.6%) and the prime lending rates. This again, has the potential to adversely impact incremental credit offtake in the domestic market.

Here, we would like to add that while the above factors could dampen sentiment temporarily, these are certainly not any cues of a bear market. The results posted by India Inc for FY06 are sufficient evidence of the fact that the long term 'India story' is here to stay. Investors need to rely less on the sentiment of the FIIs and more on the inherent strengths of our economy while making their investment calls.

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