Greece will probably be the most searched word in Google. I should be talking about Greece and its catastrophic effects on the world and India, as it will help drive traffic to investorsareidiots.com. But I am not going to talk about Greece as it takes my focus away from helping investors make money. And Greece will not help make money! No more Greece word from hereon.
I am bullish on the Sensex and Nifty and on stocks that I have recommended for investments Selecting Stocks for the Future Series .I am bullish on short and long dated government and corporate bonds Fixed income investing series. I believe I am going to make money on my fresh and previous investments. The reason for my bullishness is not because everyone around me is bearish. The reason for my bullishness is that everyone from policy makers to company managements are all focused on trying to set things right. Even if they succeed in setting things right by 25%, which is well possible, markets are on their way to recovery. Let me explain.
The Indian government is realizing it has to act prudently if it wants the country to get back on its feet. The FM is talking about austerity, bringing down subsidies, reducing fiscal deficit and keeping inflation in check. Talk will not turn into action quickly but the fact is that there will definitely not be any more free spending, loan waivers, fiscal stimulus and higher subsidies. The economy has decelerated from 8.4% GDP growth in 2009-11 period to 6.9% GDP growth in 2011-2 period and without fiscal stimulus the economy is most likely to see growth rates in or below budget 2012-13 forecast of 7.6%.
A below trend GDP growth coupled with a government that can do nothing about it will help inflation come off. Inflation at current levels of 7.23% (as measured by the WPI or Wholesale Price Index) will come despite the negative effects of a Rupee that has fallen by over 20% against the US Dollar over the last one year. The drivers of inflation namely loose monetary and fiscal policy are absent. Investment demand in the economy is down 50% over the last one year as seen by projects coming up for sanctions. Inflation is still affected by higher food and fuel prices but this will largely be negated by inability of producers to pass on costs to the consumer as seen by the margin contraction of around 350bps to 400bps for Indian corporates over the last one year.
Inflation coming off is positive for the economy, as it will enable the RBI to loosen its restrictive policy down the line. RBI will be able to lower the repo rate from current levels of 8% on lower inflation expectations. Lower policy rates will lead to lower lending rates and falling government and corporate bond yields (with a lag). Consumers will benefit from lower inflation and lower interest rates, as they will be able to borrow cheap and buy cheap. Investors will benefit from falling bond yields, as it will bring down the risk premium of investing in equities.
Corporates are busy setting things right in their businesses. Companies that are leveraged are disposing assets or trying desperately to cut costs and improve revenues. Companies that are facing weak markets are trying to consolidate. Strong companies are looking to strengthen market share through organic and inorganic methods.
The best part about the current bearishness in the markets is that it provides many investment opportunities. There is no rush to invest and one can invest with a cool and rational head. Good fundamentally strong businesses with healthy balance sheets are available at reasonable prices and focusing on identifying such companies and investing in them will give healthy returns over the next few years.
It is always good to get down to basics of investment and learning or relearning fundamentals will help in picking the right investments.
Learning to construct and maintain portfolios will enable optimum performance of investments.
I am busy with investments and I sincerely suggest you do the same.