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Stockmarkets: On a Fed lifeline

Aug 20, 2007

The last week was dreadful for the Indian stocks markets, as the benchmark indices plunged under the weight of a global liquidity crisis. However, the US Federal Reserve's move to ease its lending rate so as to soothe nerves of the financial system, led to some cheers among market participants.But, will this move contain the crisis or is it one that delays the overall (negative) impact by a few more days? Tough to answer, as it is for the Fed officials, who till now were dedicated towards inflation control as for their policy decisions and have suddenly given away to maintaining 'market' sentiment! Or what else justifies the rate cut?

No one exactly knows the full impact of the US subprime mortgage crisis that has not only rocked the US housing market but has also led the global financial system into a liquidity crunch situation. Despite the ECB and Fed's moves ofleasing out billion of dollars at 'discounted' rates to bankers during the past few days, it only seems to have added more fuel to fire that has burnt the hands (and books) of so many mortgage finance companies and hedge funds alike!

As for India, while the Indian hedge funds and financial institutions are not said to have exposure to thesubprime security market, the negative impact on stocks and sentiments has been (and is likely to be) on account of the country's high dependence on global liquidity and its linkages with the world financial system.

While the Indian stockmarkets, in line with its Asian peers, who are trading strongly in the positive currently, are 'expected' to open in the positive today, the fact that market participants are recognising that stockmarkets are actually a pretty 'risky' place, is a positive. The unreasonable belief in the possibility of getting 'rich' quickly is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes does not in any way foretell anything dire for the future, the best thing that you, as an investor, can do is to keep yourself educated, well informed and well practiced in doing your homework.

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

The latest meltdown, notwithstanding the utter confusion that surrounds the financial system, provides yet another chance for long-term investors to add on to their India portfolio - stocks, which have corrected as part of the overall correction and which now trade at relatively reasonable valuations. However, leadership in respective industries, high return on equity generation, strong balance sheets, robust cash outflows and visionary managements at the helm remain some of the key properties that need to be considered before making any investment decision.

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