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Amid stock market gloom, it is time to invest in gold

Amid stock market gloom, it is time to invest in gold
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First Published: Sun, Jun 29 2008. 11 46 PM IST

In focus: Frederic Mishkin, member of US Federal Reserve’s board of governors. Speeches by Mishkin and Dennis Lockhart, another Fed official, will be watched this week for cues on the US economy.  (Ph
In focus: Frederic Mishkin, member of US Federal Reserve’s board of governors. Speeches by Mishkin and Dennis Lockhart, another Fed official, will be watched this week for cues on the US economy. (Ph
Updated: Sun, Jun 29 2008. 11 46 PM IST
The first half of the year has drawn to a close and it has seen a bloodbath on bourses with key indices plummeting and equities melting like they haven’t for a long time in the history of the Sensex and the Nifty, the benchmark indices of the Bombay Stock Exchange and National Stock Exchange, respectively.
The Sensex has fallen more than 7,400 points, or 35%, from its peak so far this year and there is no respite yet despite equity valuations becoming attractive. Blame it on global factors—the so-called subprime mortgage crisis in the US, oil prices, inflation or the sheer inability of our super economic brains to anticipate and tackle inflation in a timely manner, focused as they were on announcing goodies for the non-deserving (read farmloan waiver).
In focus: Frederic Mishkin, member of US Federal Reserve’s board of governors. Speeches by Mishkin and Dennis Lockhart, another Fed official, will be watched this week for cues on the US economy. (Photo: Carol T Powers/Mint)
The bottom line: Indian stock markets are one of the worst performing among all emerging markets. Vietnam leads the tally with a fall of 59.48%, followed by China at 48%. Interestingly, in contrast to the Chinese and the Indian scenarios, Brazil and Russia, the other two so-called Bric countries, witnessed sharp gains between January and May. Even at current levels, the price-earning multiple of Chinese stocks is way ahead of India, which justifies the room for correction in Chinese stocks. However, India, despite being very attractive, is seeing heavy outflows of foreign funds.
With inflation touching new highs and poised to go even higher, the outlook on Indian stock markets remains gloomy with a lot of uncertainty still looming on the horizon.
As far as the last week was concerned, Indian markets fared pretty badly. Growing political uncertainties, a still surging crude, fresh trouble in the US credit markets, high inflation and tougher monetary measures to tackle it all played their part in the fall.
The early monsoon, which raised lots of hopes for the agriculture sector, has also slowed. Moreover, unabated selling by foreign funds contributed to the fall on bourses. To add to it, the political drama over the nuclear deal is making the markets nervous, since in case of a government collapse, there would be no major announcements until a new government is formed. Also,there would be no certainty over the economic acumen and mindset of the next government.
Globally, the scenario is no better, with the US at the risk of entering a bear market phase and Europe fighting hard against inflationary pressures. As a result, the outlook for global stock markets remains negative as well
During last week, the Dow Jones Industrial Average index in the US fell by 4.2% and the Standard and Poor’s 500 by 3%, its worst weekly decline since 6 June. The Nasdaq market fell 3.8%, its biggest weekly drop since 10 February.
On the positive side, the decision of the US Federal Reserve not to hike interest rate in view of inflationary pressures, was some relief to the US economy and stock markets. The US economy is already on the brink of recession and any hike in interest rates could impact its fortunes. On the positive side was commerce department data showing that personal spending rose by a greater-than-expected 0.8% in May. Also a key gauge of inflation remained muted. Economists are betting on a positive trend in consumer spending as a driver of some kind of turnaround in the US economy in the next quarter. However, there remains a big question mark on the likelihood of a continuation of this positive trend in consumer spending, if oil continues to rise.
This week is going to be a crucial week in the US, despite a long weekend due to the independence day holiday on Friday, as lot of crucial data is lined up and will throw further light on the state of the American economy.
The most crucial is payrolls report for June on 3 July. As per expectations, it is likely to show job cuts of about 60,000 compared with a loss of 49,000 jobs in May. Any number better than this could trigger some buying on the US bourses, as this will ease recessionary fears. Among other data, the Institute for Supply Management’s (ISM) June reading on the vast services sector will also be released on 3 July and it is expected to show a marginal drop.
On 1 July, ISM’s June index on the US manufacturing sector and car sales will be released. The manufacturing index is expected to show a fall in June, signalling further contraction. June car sales figures will also be an important indicator as they can help in interpreting the impact of high oil prices in the US economy. Going by expectations, car sales are also expected to drop in June compared with May.
Besides the data, speeches by two key Fed officials—Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on 1 July and Frederic Mishkin, a member on the board of Fed governors, on 2 July—will also be watched carefully, mainly for reading between the lines on the US central bank’s stand on economy. Overall, it would be an interesting week on the US bourses with all eyes set on oil and the US data.
Back home, this week, data related to fiscal deficit for May will be released on 30 June. This will be important an information and any increase in this number would be negative for the markets. Also, the weekly dose of inflation on 4 July would be crucial and may remain a deciding factor for the market trend.
Technically, the trend on stock markets remained weak in the absence of any positive triggers and more fall cannot be ruled out.
Interestingly, the market yet again bounced back from our support level mentioned in last week’s column, justifying its strength. It is worth mentioning here that the Sensex touched a low of 13,731.54 on Thursday, which was very close to the support level we had given, 13,747 points.
However, now this support is getting weak and it may get breached this week amid growing selling pressure. If this support is broken, then the next support for falling Sensex is likely to come at 13,409 points followed by a strong support at 12,987.
On its way up, the Sensex is likely to test its first resistance at 14,084 points, followed by a moderate resistance at 14,211 points and a crucial resistance at 14,504 points. If this resistance is broken, then the market outlook will turn positive.
On individual stocks, this week we have widened our coverage to include some exchange traded funds, or ETFs, also as they look better investment than individual stocks. Especially in current scenario, technical analysis of gold suggests hefty gains in the offing in coming weeks.
So, in my opinion, investing in a gold ETF, such as Reliance Gold Fund, Kotak Gold Fund or Qauntum Gold Fund, would be a good strategy. Reliance Gold Fund, at its last close of Rs1,265.92, has a target of Rs1,302 and a stop loss at Rs1,219.
Among stocks, Bharti Airtel Ltd and IVRCL Infrastructure and Projects Ltd look good on charts. Bharti, at its last close of Rs747.95 a share, has a target of Rs769 and a stop loss at Rs721. IVRCL, at its last close of Rs318.80 a share, has a target of Rs337 and stop loss at Rs291.
From our last week’s recommendations, Tata Power Ltd and Sterlite Industries (India) Ltd triggered their stop loss, while Mahindra and Mahindra Ltd touched a high of Rs588 but missed its target of Rs593.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments,questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Jun 29 2008. 11 46 PM IST
More Topics: Sensex | Nifty | Gold | Inflation | US credit market |