Sep 23, 2000|
Stock markets: Beating the retreat
The 700-point (or 15%) fall in the BSE Sensex has left many aghast. The fall, which was spread over just eight trading sessions, surprised many by its suddenness. Finally, after persistently ignoring, the markets have given due weightage to the deteriorating economic fundamentals. The results to many, however, have not been as surprising.
Letís take a look at the factors, which make the recent decline in indices look more fundamentally driven. After recording heady growth, industrial growth has slowed down to just over 4%. Infact industrial growth peaked at 12.6% in February this year. The key factor contributing to this was the drought in several parts of the country. If one were to go a little deeper into the factors driving demand the not-so-comfortable situation would become clear. In FY00, industrial demand was spurred by consumption expenditure. Investment expenditure, which is essential for a sustainable economic recovery, failed to pick up as business confidence continued to remain muted. Even as demand picked up, the corporate sector was faced with the prospects of escalation in costs (higher oil prices) and rising interest rates (volatility in the forex markets and rising inflation). These factors further depressed investment activity. Another factor that is now contributing to a slowdown in industrial growth is slower growth in exports. After recording growth in excess of 30% in both April and May, growth slowed down to 17% in July.
On the external front too the scenario does not look encouraging. FII inflows have slowed down even as foreign direct investment growth continues to be below expectations. The trade deficit has been rising in recent months largely due to a sharp rise in oil prices. These factors have contributed to volatility in forex markets. This volatility was primarily responsible for the RBIís move to raise interest rates in July. (A persistent depreciation in the Rupee could once again prompt the RBI to raise rates.)
The most important factor however has been the rise in oil prices. Oil prices will hit the economy in several ways. First consumption demand will be hurt as individuals spend more on fuel. This in turn will further dampen investment demand (why build more capacity when there is no demand). Secondly, higher oil prices will inflate costs of production. Companies can either choose to absorb this rise (lower margins) or pass them on at the risk of adversely affecting demand. Thirdly, from a macro point of view, the government will witness an escalation in its subsidy bill (albeit off budget). Attempts to pass on relief (like reducing customs duties) will then reflect in the budget. This could mark a turnaround in the recent improvement in central government finances. And finally, as mentioned before, rising oil prices will contribute to a larger trade deficit.
All these factors make it clear that fundamentally the scenario had changed quite dramatically since the start of the year. The stock markets were however still to react. Now, however, the gravity of the situation seems to have dawned in earnest.
Does that mean all is gloom and it is time to head for the exit? Well, that too would not be the right approach. Investors need to rebalance their portfolios to include anti inflationary investments like gold. Also there is a need to keep an exposure to stock markets (at any point in time the markets do offer an opportunity). Remember, after all the Indian economy will continue to be one of the fastest growing nations in the coming years.
Read more on Indian Economy
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 21, 2017
PersonalFN explains the chief factor pushing gold prices up of late.
Aug 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407