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Dear
Investors,
Over
the last
few weeks,
investor
confidence
in the
Indian
equity
market
has been
smashed
out of
shape.
Investor
networth
has been
eroded,
confidence
in the
IPO market
has been
badly
shaken
and there
is no
clear
respite
in sight
from the
US economy.
For a
change,
any rise
in indices
or stock
prices
is being
viewed
more as
a relief
rally
rather
than a
turn around
in market
sentiment.
While
equity
market
benchmark
indices
might
have crashed
by around
23% from
their
peak to
their
lowest
levels,
several
individual
stocks
- momentum
or otherwise
- have
corrected
by as
much as
40 - 50%.
Worse
still,
they are
showing
limited
signs
of recovery.
Stocks
which
ran up
on the
back of
themes
like embedded
value,
unlocking
of value,
de-merger
of companies
etc have
been the
worst
hit. The
listing
of Reliance
Power
IPO at
a considerable
discount
to the
issue
price
precipitated
the erosion
of market
sentiment.
Encouraging
corporate
results
have been
ignored
and stock
prices
have been
beaten
down to
levels
where
valuations
now look
fair and
realistic
as opposed
to stretched
valuations
that we
were seeing
a while
back.
Based
on economic
developments,
are there
any signs
of the
global
economy,
the emerging
markets
or the
Indian
markets
being
out of
the woods?
Well,
the global
liquidity
crisis
is real
and cannot
be wished
away easily.
Based
on the
huge losses
incurred
by Banks
in the
USA towards
the mortgage
portfolio,
to expect
that liquidity
will return
easily
into the
financial
markets
would
be a folly.
Till the
pain remains
and full
provisioning
is not
done towards
the mortgage
portfolio
losses,
global
confidence
in the
potential
flow of
investments
into emerging
markets
or into
the Indian
equity
markets
will remain
a question
mark.
This is
despite
the fact
that it
has been
widely
accepted
now that
while
the US
economy
will be
certainly
hit, the
emerging
market
economies
are expected
to be
affected
only to
a limited
extent.
Historically
recessions
in the
US have
lasted
for between
8 - 16
months.
However
under
the present
manifestation,
with global
financial
markets
being
more cohesive
and with
better
instruments
available
to Central
Banks,
a US recession
(if at
all) could
be short
lived.
This is
particularly
true since
the broad
US economy
is understood
not to
have been
as badly
affected
as the
financial
and the
housing
markets.
What
this clearly
means
is that
while
confidence
in the
Indian
equity
markets
has been
shaken,
there
is no
question
mark yet
over the
long term
growth
of the
economy.
Though
certain
sectors
of the
Indian
economy
could
get affected
by the
US slowdown,
the internal
consumption
story
will ensure
that the
GDP growth
will continue
to remain
above
the 7
- 7.5%
mark over
the next
few years.
In terms
of a possible
change
in market
sentiment,
we believe
the Finance
Budget
could
make a
small
difference.
A clear
strategy
to significantly
enhance
Government
expenditure
on Infrastructure
across
the country
could
provide
a prop
to the
sagging
sentiment.
With
global
interest
rates
on the
downhill
and presuming
that inflation
in India
will be
under
control,
we believe
that there
is a good
possibility
that interest
rates
in India
too will
move southwards
over a
period
of time.
For risk
averse
investors
with a
1 year
or greater
investment
horizon,
we believe
Income
(Bond)
Funds
could
be an
ideal
place
to park
funds
with expectation
of close
to a double
digit
return.
For those
willing
to take
risks,
invest
in large
caps with
an expectation
that markets
will continue
to be
volatile
for some
more time
but in
the longer
term will
yield
good returns.
Happy
investing!
Nipun
Mehta
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