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Economy: Fault lines!

Jul 18, 2006

Imagine the world as a football, with all the variables affecting it as players. However, while real life football is lucky enough to survive the onslaught of players from just two sides at a time, there are more than a few players (variables) who are kicking around the world (the football) at one go. And the effect - the world does not seem to be going anywhere. In fact, it is hard pressed to survive against the kicks of the many variables, including record high crude prices (no signs of cooling off), tensions in the Middle East, nuclear ambitions of North Korea, rising inflation and interest rates, terrorist attacks and, of course, the occasional natural disasters (Tsunami in Indonesia being the latest). As for India, apart from the terrorist strikes on Mumbai's suburban railways (that has the ability to dent investors' confidence), there are other disturbing factors that are playing their role, all at the same time. Widening trade account deficit and the consequent weakness of the rupee (thus also affecting inflation from the import side) and the ongoing political turmoil at the Centre, have also depressed sentiment.

Corporate India, however, continues on its march of strong growth, atleast if one were to consider the companies that have announced their June quarter results (for example, Infosys, HDFC Bank, Hero Honda and Bajaj Auto). The topline remains strong for these companies, with some being aided by depreciating rupee and some due to strong volumes. However, on the profitability front, higher employee costs and raw material costs continue to dent margins, though at a marginal pace.

The result season has just begun and we still have to get a clear idea of how things pan out for India Inc. However, till that time, there is a lot to chew for investors (variables mentioned above). With the world getting 'flatter' day-by-day, there is no choice for investors but to factor in all global cues before making investment decisions. Select sectors like pharmaceuticals, telecom and technology, though, still present good long-term stories. However, investors need to look very carefully at the variable called 'valuation', for it has the ability to upset the applecart, even if the stock under consideration has a strong past performance to its credit.

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