I was in the US a couple of weeks back and met a lot of professionals in the financial advisory space. A lot of financial professionals that I spoke with talked about hiring freezes in most banks and financial institutions. It was also surprising to see that many financial advisers were talking about increasing investment allocation in India.
In the US today, getting a home loan has become difficult for an American even with a good credit history. Loans are taking longer to be disbursed and one could witness a clear slowdown in the banking and financial services, real estate and auto space. On the other hand, when I went to an Apple store (a similar scene is witnessed day in and day out at most Apple stores), there was no place to stand and the counters were buzzing with orders. A similar scene was witnessed at Cheesecake Factory, a restaurant chain with restaurant sizes in the range of 8,000-15,000 sq. ft. There is a waiting time of 30 minutes in such large format restaurants. The point is that there are certain sectors in the US that are doing extremely well and you can see this from the cash piles on the balance sheet of many US companies. Though there would be a continuation of the slowdown in several sectors, the US economy may not pose a big threat to the world as yet.
The thing that is really worrisome is the health of some European countries. Germany and 12 other countries (out of 17 countries in the Euro zone) passed a €440 billion EFSF (European Financial Stability Facility) fund to make precautionary loans, help recapitalize banks and buy distressed countries’ bonds in the secondary market. The sentiment still looks negative in Europe and some countries such as Italy and Spain could spell trouble for Europe and the world in general.
Domestically, the central government’s fiscal deficit surged nearly two-fold to Rs 2.7 trillion during the first five months of the current fiscal due to low revenue realization compared with Rs 1.5 trillion in April-August 2010. This is much above the government’s budget estimate and could worsen sentiments among global investor, who have been net sellers in the Indian market in 2011 (they have been net buyers in some months buying billions of dollars).
Going into October, quarterly results will be the key numbers to look out for. However, domestically looking at the advance tax number, the top 100 companies rose a modest 9.9% in the second quarter ended September 2011 compared with 19% growth in the first quarter ended June 2011 (suggesting that corporate profit growth is likely to be muted in the second quarter of FY12).
The equity market continued to be extremely volatile in September 2011. Looking at the global scenario and economic data, markets will be very challenging in the short run. In short, a downside of 15% cannot be ruled out from the current levels.
The general advice would be to buy the dips, which would make sense from a long-term perspective. However, you have to live the short term and an equity investor has to demonstrate emotional strength to ignore the short-term red on investments. Hence, a prudent strategy would be to go slow in making one-time investments in equity and invest primarily through systematic investment plans (SIPs) and DIPs (one time investments on days when the market fall). This has been one of the best strategies to capitalize on the market volatility. These are times when one must have cash to take advantage of extreme opportunities that might come by.
Valuations today are excellent for equity investments but they could get even better in the short run. The current sell-off has got nothing to do with India but it’s about Europe and the perceived risks to the global economy. Investments made during such times will return abnormal returns in the next few years but one could see red in the short term. Hence go slow and the best way is to buy quality investments at low levels and hold on till target prices are reached or till your financial goals are reached or if the investment starts underperforming.
Conservative investors should exit certain equity investments (where fundamentals have deteriorated) and increase exposure to debt and gold. Every rise can be utilized to exit such investments.
Amar Pandit is CEO, My Financial Advisor, a financial planning firm.
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