What do the markets hold for investors?

With the kind of fickleness that domestic markets have shown in recent times, making a near term call on the market is next to impossible. However, for long-term investors, the markets are once again presenting an investment opportunity.

Before we delve into the long terms aspect, let's take a look at what have been the underlying factors that caused this bearish phase in the markets. First ofcourse is the drought. With over 60% of the Indian population living in rural areas, a decline in agricultural output has a significant impact on domestic consumption activity. This is already evident in the sluggish growth in sales of consumer products. Next to hit the market sentiment was the floods in the East, which once again impacted consumption activity, apart from, once again, impacting agricultural output.

Second, is the slowdown in industrial activity. This has been triggered by sluggish growth in consumption, which in turn has contributed to the dull investment climate. Overall, the industrial sector has been hit by both slower consumption and sluggish investment activity.

Another factor responsible for contributing to the industrial slowdown and also to the change of sentiment on the bourses has been higher crude prices. This has created a situation where inflation is rising and so is the deficit in the oil pool account. The oil pool deficit has significant implications for the fiscal position of the government.

The three developments stated above have been largely responsible for the sell off in the markets (apart, ofcourse, from the fact that few companies have announced lower than anticipated earnings in the second quarter). In such a scenario, where does our enthusiasm stem from?

Well, despite the slowdown in the Indian economy, we are still likely to post a GDP growth rate of 6%. This is in line with our average growth rate recorded over the last few years. Also, the ills mentioned above are hardly fundamental to the economy. They are not the result of bad policy decisions, but natural developments. Taking a call on agricultural output in the coming year would be like betting on or against a normal monsoon. Ditto for crude oil prices. The slowdown in consumption activity that has hit domestic demand is more temporary than permanent (unless ofcourse someone believes that monsoon will fail year after year).

Over the long term, the impact of sub normal monsoons or a spike in oil prices will seem no more than a blip on a chart plotting the stock market indices. What would matter are the long-term fundamentals of the economy/industry/company. And these remain firmly in place. Infact, with the reform process moving on (albeit slowly), the Indian economy is likely to become more vibrant in coming years. For long term investors the markets have once again presented an opportunity to enter into stocks that have been hit more by sentiment than fundamentals. And as history has shown, mis-pricing in the markets is always corrected.