Source: EM If you have been waiting on the sidelines to invest in the stock market, then, this is the time to start allocating your money towards equities. But again, it is pertinent to stick to one’s risk-return profile and also take a staggered approach to investing in stocks. Over the next two to three years, we believe that equities can deliver 15% to 20% return per annum. Here is our take on the stock market and the way forward.

First of all, we are not great experts in predicting the level for the index. We also do not predict commodity prices, both of which are not only governed by global demand-supply equation but also investor sentiment. We leave the prediction game to the ‘experts’ and with this as the background, here is what we think investors should do.

A rewind… The decline in the Indian stock market and for that matter, the stock markets globally, is commonly attributed to the Federal Reserve’s stand on interest rates in the US. While it is difficult to predict when the Fed will stop hiking interest rates (in fact, some economist are very critical of the Federal Reserve’s policy to hike interest rates gradually), we have been firm believers of the fact that it will have an adverse impact on FII inflows into India. And it has, after a long time (after 22 months, started in June 2004). In the recent Fed meeting on May 10th, 2006, the committee highlighted the fact that further policy firming is possible to address inflation risks. The Fed has already raised interest rates 16 times, each time by a quarter of percent. What is impacting global markets is the fact that a further rise in Fed funds rates (in light of the recent inflation data) could impair the pace of global growth, consequently impacting commodity demand. Thus, the downward effect in commodity prices and stocks. Some have even attributed to the recent decline in commodity prices to the selling by hedge funds and not necessarily to a sudden change in the demand-supply equation for commodities.

Take a Pause… In these volatile, it is pertinent to take a pause and reflect on the fundamentals.

1. First of all, this is not a ‘bear’ market. It is a correction, which is healthy. However, the extent of volatility and the magnitude of fall in such a short span is not something investors would have anticipated.

2. The correction does not change the fact that, even now, there are promising investment stories from a long-term perspective. Yes, given the fact that interest rates have risen (both in India and globally), debt is also becoming attractive. In the case of debt, however, we suggest investors to invest in short-term fixed deposits or floating rate funds (to know more about investing in mutual funds, log on to www.personalfn.com).

Fast forward… Benjamin Graham once said, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion (consensus). However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism (fundamentals).'

Posted by toughiee on Thursday, May 18, 2006 at 5:52 PM | Permalink