Markets at a high. Is it a good time to invest?

Markets at a high. Is it a good time to invest?

Each time the stock markets hit a new high, retail investors kick themselves for not buying more the previous week; those still deciding when to buy kick themselves for their bad timing. When Indian markets hit a two-year high ealier this week, people wondered: Is it a good time to invest or have the prices run up too much?

Also Read Monika Halan’s previous columns

The last two years saw the US pumping $8 trillion (around Rs360 trillion) including guarantees, loans and direct outlays, into the system. Interest rates remain almost at zero (target range of the federal funds rate has been at between 0% and 0.25% since December 2008), creating conditions that fuel asset bubbles. The second leg of the meltdown could get triggered by several events, but two are at the top of the worry list. One, if the US slides into a double dip and parts of Europe go under. Two, when the US begins to raise interest rates. How badly hit will India be? Fund managers in India who manage retail equity money remain nervous about the North Atlantic crisis. Don’t be surprised at a 30% drop in our markets in the next 12 months, says one from a fund house that has given its equity investors solid decadal returns.

So, why do I say invest? Because we don’t know when that meltdown will come. Because we won’t know if it is a meltdown till two months after it occurs—every meltdown began as a short correction—and because the India story looks very good. Because, despite all our problems, India is one of the few countries that has the potential to pull the North Atlantic countries out of their problems. Not this year or next, but over the next decade and more.

How will the unthinkable happen? The developed North needs their GDP to grow, which it will if goods and services begin to move off the shelves again. But with unemployment rates still high and US households preferring to bring down their average debt from the current 17.5% of disposable income, their domestic demand is unlikely to be on fire for some time to come. Where will this demand come from? From the emerging markets, of course, says Jerome Booth, the head of research at Ashmore Investment Management, in an interview to Steve Forbes (http://bit.ly/d8lkoU). His advice to investors in the developed world is to look for countries with growing populations, increasing domestic demand, capital self-sufficiency and growth potential. India is one country that fits his strategy. He believes that the sovereign risk in India is lower than in “developed" countries in the euro zone such as Portugal, Italy and Greece. He says: “...if we can somehow get their...exchange rates up and export to them and they can export their inflation to us, and we’ve got deflation, then I think that will be a well-managed result. And that’s what we’re hoping for. That’s what the G-20 (Group of Twenty) is about."

India as a global destination for funds, in both equity and government bonds, sounds unreal when we look at daily news that is all about the Maoist threat, about inflation, about the politician-babu-builder-criminal combine selling our country bit by bit. All true, but most local news is myopic and every country tends to believe it is worse off than its neighbours. So despite the problems, the big picture still looks good.

Should you invest? Well, even if you won’t, others across the world will. And Indians should get a piece of our growth, surely? So invest. The safest way is in exchange-traded funds or choose out of Mint50 (www.livemint.com/mint50). Go out and buy a large chunk today? No. Stagger it over time. Nobody knows when the next 30% dip will come. Or even that you need to worry about it long term.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is consulting editor with Mint and can be reached at expenseaccount@livemint.com

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