Thursday, July 17, 2008


With crude showing signs of cooling off, stock markets look poised for a rebound. It also depends on the vote of confidence scheduled for the 22nd and the inflation figures. In my opinion it’s a good time for long term investors with a time horizon of 2 years and above to go on a shopping spree.

Oil, which has been a major drag on the markets is projected to react to $100 to $110/bbl in the next six months. The reasons are slowing demand for gasoline in the US, the relatively lower growth in GDP projected by India and China and the comments of the King of Saudi Arabia seeking lower oil prices. If oil prices fall as expected, this would provide a huge boost to economies like India and consequently their stock markets. Since higher oil prices are already factored into current market levels, any positive news could act as a trigger.

On the political front, the exit of the left parties should act as a pleasant surprise for stock markets, only if the government survives the vote of confidence. In such a scenario, the Government would be free to aggressively push reforms in insurance and banking sectors. Moreover the disinvestment process of PSU’s would get a huge boost, bringing quality new issues to primary markets and increasing the depth and liquidity of our markets in addition to improving sentiment among battered investors. Also opening of the insurance sector would bring a flood of FDI into the economy, thereby strengthening the Rupee.

Inflation poses a huge risk to the markets, but again most of the bad news is built into prices. Though inflation is not expected to fall off any time soon, it is after six months that the higher base effect will kick in. Since, in India inflation is measured on a YOY basis, we are getting inflation figures compared with last year’s figures. Inflation was quite low at this time last year hence we are seeing disproportionately higher inflation growth figures. Also by this time we will see some of the measures taken by RBI to curb inflation take effect. Another positive would be the normal monsoon, at least till now, which would bring down the prices of food articles.

A caveat here is that any of the above scenarios not happening could act as a dampener. But in my view, current prices hold value for investors willing to wait it out and having the capacity to bear some potential pain in return for longer term capital growth.

1 comment:


Where do we go from here. Ask someone in the euro zone the question.