(Not So) Hot Investment Going Ahead

We seem to be recovering from the global correction. The developed equity markets are already trading near their respective all time high. The Federal Bank of US seems to have settled on current interest rates, following the data on GDP growth and CPI (Consumer Price Index) numbers in recent weeks. The ECB-3% (European Central Bank) and BoE-4.75% (Bank of England) have raised their interest rates on Aug 3, 2006, in response to curb the inflation. Recently BoJ (Bank of Japan) ended zero interest policy by increasing interest rates by 0.25%. And recent data on Aug 10, 2006 from US and Japan shows slowdown in both the biggest economies

All these incidents point towards tightening liquidity in global markets. So we will see a slowdown in consumer spending. Now it will become difficult to find buzzing companies, but there are some significant sectors that will perform better and give better returns in short term, viz. Commodity especially metals, Cement, Sugar, Oil refinery (not marketing), Infrastructure – especially due to SEZ. These sectors especially seem to be poised for exponential returns.

Apart from that we have some developed sectors that will give stabilised returns like IT and ITES, Banking and Financial services, Telecommunication, Manufacturing and Engineering services sectors. If you are ready to stay in the market for a longer period of time then you can expect good value accrual and dividend returns. But there are few sectors that are under serious threat especially due to current global scenario, viz. Oil marketing companies, Aviation. Well, all this is on macro level and for neophytes and there are exceptions for each and every sector that will show the results otherwise. We are nearing to the time where the markets become developed ones and give less than double-digit growth y-o-y and Profit margins also come under 10%,

This indicates to a fact that the investors have to come to terms with margin pressures, low profit levels, lower ROI and lower growth from the companies that are listed currently. But that does not mean that India's growth story is over. There are many Mid-cap and Small-cap companies that will probably replace current Large-caps in coming years. Many more companies are yet to be listed that have huge growth potential. But certainly cost competitiveness of India has drastically reduced in past 2-3 years. So the chances are that we will never see the dramatic growth again as we witnessed from May 2004 to May 2006. It will always make more sense in being selective before investing.

Investment risks

Investment is no longer cakewalk, as we are witnessing the global economy in turmoil. The biggest factor disturbing world economy is fuel prices. Let’s count the repercussions of the one factor.

With the fuel touching skies, it directly affects commodity prices, transportation, which in turn causes inflation in economy. In India we are again touching 5% inflation. This makes central banks world over to raise interest rates. So cost of all loans goes higher. This affects all investment plans for people as well as corporate. In high inflation, the yield (returns) of government bonds and bank fix deposits decreases, which is supposed to be the most risk free investment.

So we consider second option – equity. With inflation fear, people start worrying about company profits, so disinvestments from the market start. This results in crash in market, similar to what we are witnessing now, as people start cashing on their investments. This phenomenon is termed as liquidity crunch, and this sets up more panic in the market.

Third option – real estate. As the interest rates are raised, so are the costs of home loans. So suddenly there is lack of demand for homes in the market. That’s just what is happening in America. First in low interest period, the demand for homes pushes the prices higher, and then the inflation again causes the real estate value to go higher yet. When these prices are at peak the interest rate are raised, which suddenly kills demand, which leaves people high and dry. The property prises suddenly fall, which hurts the people who invest in property at peak.

There is discernible pattern in these proceedings. This is a continuous cycle. The interest rates keep going higher and lower. Property prices follow the same path. The inflation keeps varying up and down, but fuel is something that keeps going higher and pushing inflation up. To keep check on inflation, fuel problem has to be solved. All other are cyclical phenomena.

Even then the question remains – why we are witnessing such wild swings in market. Answer here is again fuel uncertainty. That exposes one factor – lack of information. All the top economists agree on the fact that it’s information that is the only thing that keeps the volatility in the market in check. Right now, that’s one thing that no one can ensure. Not even Ben Bernanke. No one knows future of fuel, so no one can tell the limit of inflation. But one thing is sure that it’s a non-permanent problem. The solution will arise and things will get sorted out.

Till then, there is only way to secure investment. Do not invest in something, which you think is expensive, be it shares or property. Wait for market to crash, because it will, just like share markets did recently. Crash is not negative thing, it’s sign of information restoring and it’s great opportunity to invest. So hold on to your cash till you see crash and encash your investments at peak. This is what they call bulls and bears phases. By definition bulls are the ones who want the prices to go high so that they can SELL and bears are the ones who want the prices to come down, so they can BUY. It’s bears, who are supposed to know the value of market better than bulls. It’s bears, who start the Bull Run. So don’t worry, rather make merry in market crashes.

- UMESH SANT