Prime Minister Manmohan Singh cautioned people on the domestic impact of the sub-prime crisis in global financial markets at the National Development Council Meeting on December 19. He said it could affect the country’s exports as well as capital flows since our economy is now increasingly integrated into the global economy, with the external sector accounting for almost 40 per cent of GDP and we cannot Remain fully immune to international devel-opments. Prior to these remarks the mar-kets had plunged by about 1,000 points over concerns that rising inflation in the US would cap further rate cuts there and thus limit the capital flows into emerging mar-kets like India.
A federal rate cut of 25 basis points on December 11 was already taken into account by the markets. However, the Fed Rate cut, when seen in the context of the US slow-down, could be a good sign for Indian mar-kets especially when the Indian economy is likely to sustain a growth rate of about 9 per cent. The American slowdown could have been dangerous for international markets had it been of serious magnitude. But that doesn’t appear to be the case for the latest forecasts of OCED estimate the US growth rate to remain at about 2 per cent for the next year.
Meanwhile, the Index of Industrial Production for April-October 2007 increased by 11.8 per cent as against the market expectation of 11 per cent only. Moreover, India Inc may continue to show robust growth in profits even this fiscal as indicat-ed by the advance tax data released by the Ministry of Finance. The corporate tax col-lection registered a 42.37 per cent increase during April-December 15 compared to the same period last year. The personal income tax collections (including Fringe Benefit tax etc) have also increased by 42.83 per cent for the same period.
The direction of the equity markets will be difficult to predict. Despite monetary tight-ening, the fundamentals remain reasonably good. The recent past has witnessed some vigorous capital raising which seems to con-tinue in the new year as well. However, political uncertainty remains the major con-cern for the markets. Besides, the Sensex P E of around 27 is also a cause of concern as the valuations appear already stretched.
Moreover, there is always a possibility that liquidity flows may get stalled because of changing perceptions of overseas investors. The earnings of corporates may also weak-en due to reasons such as interest rates, increasing raw material prices, etc.
In these circumstances, investors are advised to adopt a really long-term approach since the short-term scenario can be severely volatile. Investors should stop looking at stock prices every day. And those with nerves of steel can always use major dips in the market as a buying opportunity. The need of the hour is to keep a cool head and play the ball on merit. Though returns in general may shrink, good investment opportunities are always available irrespec-tive of Sensex levels.
Higher volatility often leads to panic reac-tions by various market participants result-ing in inadvertent mistakes. A long-term investor should not be influenced by it, so long as his investment decisions are based on the fundamentals of the company and the general macro environment. Moreover, growth over a period is always higher than one-time gain. Also, frequent sale and pur-chase always proves costly in terms of miss-ing opportunities as also the expenditure involved in brokerage, STT and other charges. The long-term investor benefits on the taxation front as well if the sale and pur-chase is planned properly.
