The Hindu Business Line : Investor’s biggest challenge in six years

Volatility in the stock markets has left investors baffled. Though the bullish tone of the Sensex may remain intact for the next couple of years, the Indian economy might see its ultimate litmus test in 2009 when growth starts moderating, demand slows down and supply side constraints ease out completely.

India is increasingly integrating with the global economy and the current volatility has to be attributed to various global factors, the major one being the subprime mortgage woes. The movement of the market over the last few weeks clearly shows how religiously we follow the US and other global markets.

The indices worldwide rose propelling the Indian indices too to their all-time highs backed by favourable statements from the US Federal Reserve that sub-prime mortgage woes would not hold back economic growth. However, with BNP Paribas suspending redemption amongst three of its funds after sub-prime loan defaults, the ugly face of the sub-prime crisis raised its head again.

Going forward, investors also need to discount and factor in various other issues that will impact the movement of our markets like inflation in China.

China is all set to announce its highest inflation in 10 years and any measures that the central bank takes will impact global liquidity. Bank of England is also on the verge of announcing another round of interest rate hikes to bring inflation within target levels

Rupee appreciation, which has been a major factor for the recent rise in the liquidity inflows into the country, has supported the bull-run so far.

The rupee created a natural hedge for FIIs and now with the currency all set to decline a bit from current levels after the RBI imposed curbs such as ECB restrictions to slowdown capital inflows from overseas, FIIs will naturally start booking profits and move their funds to other emerging markets where valuations look attractive.

Therefore, in such a scenario, the volatility on the Indian bourses is expected to continue given the fact that our markets are trading at a premium valuation to other emerging markets. The markets are expected to consolidate or move sideways with a negative bias for some more time to come until all global worries ease out.

India Inc. should hopefully come out with a strong corporate scorecard in the second quarter for the upward momentum to begin.

Until then, investors must follow a stock-specific approach and stick to fundamentally strong companies that will merit a buy at lower valuations.

With headline inflation well under control now and interest rates having peaked out to a large extent, investors can also look at options such as adding debt funds to their portfolio to bolster returns in a volatile scenario.

K.M. Shravan Dharmaraj, Chennai

What the investors are going through is a world phenomenon. While sometimes the fall might be mild, it could also be severe at times. Investors should be quite prepared to handle such situations in future.

SN Thiruvazhiode, Kochi

The credit crash cannot come as a surprise for a country like the US. The incident has proved that when necessities are made available on credit and that too with no limit, bad debts are not far away.

The strengthening of currencies across the globe against the US dollar has added fuel to the fire.

With no visible end to inflation, investors are facing their biggest test yet..

Pulkit Soni, Indore

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