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Stockmarkets: Tough times ahead?

Aug 22, 2007

The past few weeks have tested the mettle of the Indian stock markets, which have been highly susceptible to the happenings in the global markets. Just when it seemed that the Indian markets would stage a recovery in line with its global peers towards the end of last week, uncertainty back home led the indices to reel under pressure, as the benchmark index, the BSE-Sensex, shed over 400 points yesterday. In this article, we shall take a look at the factors, both global and domestic, that have created a panic situation in the markets and the implications of the same.Global scenario: Persistent concerns over the credit and subprime mortgage market have taken their toll not only on the global markets but on the Indian markets as well. Most of the world's well-known financial giants like Bear Stearns, Lehman Brothers and Merrill Lynch created complex derivatives based on sub prime loans, which were marked to market and sold. The crisis arose when defaults on these sub-prime loans surfaced, having a dampening effect on other forms of credit as well. Since complex financial instruments were created around these subprime loans, valuing the same proved to be a difficult task, as a result of which the extent of the crisis could not be gauged.

While India does not have a significant exposure to the mortgage market, it is not completely insulated from the global markets either with a large part of the money flowing into Indian equities being attributed to the Foreign Institutional Investors (FIIs). As a result, this sub-prime crisis has seen the FIIs book profits on their Indian exposure to pare their losses in the other global markets, thus highlighting the vulnerability of India to external shocks.

Indian scenario: While the crisis in the global markets showed some signs of abating with the Fed cutting its discount rate by 50 basis points thus leading to a rally in the global markets, the Indian market shaved off nearly 400 points yesterday owing to uncertainty on the political scenario. The role of politics in the country cannot be undermined. In fact, politics play an important role in determining the direction of the economy and consequently companies. This is because for any economy to grow and prosper, it needs to implement policies and reform measures that may yield benefits only over the long term. Thus, an unstable political environment not only hampers economic growth but also tends to adversely impact the stockmarkets, the barometer of this economic performance. With the impasse on the nuclear deal between the UPA government and the Left, concerns have been imminent on the likelihood of early elections in the country, if the latter withdraws its support to the government.

Amidst the global credit crisis, the ace up India's sleeve was the strong fundamentals supporting the India growth story. While economic growth is expected to remain strong in the coming few years, nevertheless, resolving the current political turmoil in the country definitely assumes significant importance.

Looking ahead...
These are testing times for the Indian markets indeed and investors will need to weather the storm by investing in good quality stocks from a long-term perspective. This is because these stocks, despite short-term hiccups, will continue to reward shareholders with strong returns owing to strong managements, consistency in delivering healthy profits and strong return ratios. Thus, the key is not to panic, but in fact identify one's risk appetite, stay disciplined and invest for the long term.

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