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Where to invest now

Where to invest now
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First Published: Wed, Jun 04 2008. 11 54 PM IST

Updated: Wed, Jun 04 2008. 11 54 PM IST
Whether it is a bull run or a bear hug, the market throws up opportunities for those who look out for them, and for those who invest wisely. Here are three broad scenarios for you to mull over, depending on your outlook on the market. The first is the worst-case scenario: the period of great returns is over, and it is now time for the bears to call the shots. At the other end of the spectrum is a highly optimistic view of the India growth story going strong. Then there is the perspective of the realist—that it is impossible to predict which way the market is going to go. We leave it to you to decide which category you belong to. But, while it is great to have your own beliefs and views, it is worth it only if you act upon them.
THE PESSIMIST
All the talk about the India growth story is simply politically correct mumbo-jumbo. And the spiel is being dished out by those who are too scared to face the truth. From now on, the market has only one way to go—downhill.
Weak company results and the slowdown in gross domestic product (GDP) give the impression of a fatigued swimmer flailing for the shore.
Inflation keeps raising its ugly head. Then there is the political gridlock over the Indo-US nuclear deal. Elections are looming, bringing with them uncertainty—which the market hates. And that is only on the local front.
Globally, the threat of a US recession has turned into a reality. Ever heard how capitalists talk about privatizing profits and socializing losses? Well, the US is certainly socializing in a big way. The fall of the Wall Street firm Bear Stearns Companies Inc. was probably only the start. Anyone will realize that the world’s biggest economy has entered a full-blown bailout mode, which goes beyond the usual strategy of cutting short-term interest rates that its central bank has done several times since September 2007.
Globalization is a double-edged sword. If India can benefit from an increasingly globalized environment, can it be immune to a global weakness? And, to add fuel to the fire, the price of oil remains alarmingly high.
All right, the world may not have come to an end, but the bull run certainly has. The bulls had a great time from 2003 to end-2007, and it is time for the bears to come out of hibernation.
2008 is the year of the Great Indian Meltdown. Face it.
THE REALIST
It is amazing how opinionated people get at every turn of the market. A downturn, however temporary, has the prophets of doom crawling out of the woodwork. And the moment the market gains a bit, those perennial optimists start echoing each other’s opinions. The fact is that no one knows where the market is headed: up, down or range bound.
On the one hand, we do have the India growth story firmly rooted in domestic consumption. But, on the other, the US recession is a reality, and it is foolish to presume that India will be insulated from it.
Gross domestic product growth has slowed from the 9% levels, but will continue to clock around 8%. Not bad at all. But the battle with inflation continues, and the political uncertainty—thanks to the differences over the nuclear deal and elections—is here to stay.
But then, who knows if the market will ever rally substantially to give a good return on investment? Don’t believe anyone who predicts what is going to happen. Would anyone have predicted the subprime crisis, which was barely a cloud on the horizon a year ago?
In July 2007, Charles Prince, then chief executive of US financial firm Citigroup Inc., said: “When the music stops, in terms of liquidity, things will get complicated. As long as the music is playing, you have got to get up and dance. We are still dancing.” Could anyone envisage then that his dancing days would end abruptly?
And then, at the start of this bull run, did anyone predict the Sensex, the Bombay Stock Exchange’s benchmark index, would touch 20,000?
That is the reality. No one knows what to expect.
THE OPTIMIST
One downturn, and everyone is convinced that the sky has fallen. It may have fallen elsewhere, but not in India.
Sure, living in an era of globalization, we are bound to get hit. But, there is ample activity within the Indian economy to soften the blow. Domestic demand, increasing employment numbers, rising incomes, a growing middle class, coupled with mounting customer credit and increased infrastructure spending, will keep the economy on a roll. The demographics are strong enough to ensure that consumption growth will be a key driver.
Intra-regional trade will also reduce the impact of a slowdown in the developed world. In terms of exposure to US consumption, India is the least affected among the major Asian markets. There has been integration in Asian economies, and India no longer exports only to the West.
The Economist recently reported that the four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the US: Exports to the US accounted for just 4% of India’s economy, while the figures for China, Brazil and Russia were 8%, 3% and 1%, respectively.
It is only natural that the Indian market reacts to the global turmoil. The capital market is sensitive to global dips and short-term volatility, and it is something we must get accustomed to. The factors driving the market are long term and structural in nature. Within this structural run, there will be shorter term cycles. And within different cycles, the sector leadership may differ. But the fundamentals of the economy remain strong, and the prospects upbeat.
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First Published: Wed, Jun 04 2008. 11 54 PM IST