There comes a time

When one has to just sit back

There are times in the stock markets where there are events on a daily basis and reacting to those events with pulls and pushes on both sides might not be the best thing to do. I believe that we are in a similar scenario today where on a fundamental basis the valuations look comfortable and most of the negative news flow seems to be in the price, however various unpredictable events like the happenings in Egypt, Libya and the consequent increase in crude oil prices is hitting the markets negatively. If we go back a year from now the two main concerns that were there for the markets were

US Recovery – The US economy a year back seemed to be nowhere to a path of sustainable recovery. There were concerns on joblessness, deflation, consumption growth, budget deficit etc. etc. As we stand today most investors seem to be absolutely sanguine on the US economy and the markets with the US markets becoming one of the best performing over the last six months. Economic activity has revived to some extent in the US and the jobless rate has come down. Deflationary concerns are no longer there although most investors are not expecting inflation to come back anytime soon. However the twin concerns of the impact of monetary stimulus and reduction of fiscal stimulus still remain. However at this point of time, most investors seem to be ignoring that fact.

PIGS – This was the biggest concern for the markets a year back with most of the PIGS countries staring at debt defaults and the expectation that the entire thing could also spread to the larger European countries. However with the set up of the Euro zone rescue fund and the recovery in key European countries along with Fiscal consolidation in the troubled ones this issue has totally gone into the backburner. Stock markets of most troubled countries have bounced back from their bottoms and the larger markets of UK, France, and Germany etc have been one of the best performing markets in the world over the last few months.

As we stand and look today the markets which were facing the most troubled and where investors were highly underweight have infact turned out to be outperforming markets. On the other hand the fancied emerging markets have seen significant corrections. The current concerns for emerging markets are

Inflation – Inflation is the biggest story going around for emerging markets at this point of time. Most investors are shunning high growth emerging markets on inflationary fears, although a large part of this inflation is largely due to the policies of the US Fed. I believe that sooner than later the developed world will also stare at inflationary pressures and at that time it will be a double whammy for them. There is a realistic possibility of stagflation in the US if reversal of the extreme monetary policy does not start at the earliest. Reserve Bank of India has been one of the most aggressive central bankers in tightening policy and seems to be ahead of the curve vis a vis other central banks. In a globally linked economy if the largest economies of the world keep on printing money it is very difficult for RBI in isolation to control inflation. However the good part is that the Chinese central bank has become serious on controlling inflation and the ECB is also changing its language on the same. Most commodities ex of oil and precious metals have started to correct over the last couple of weeks. Crude oil should also have corrected but for Egypt and now Libya.

Middle East Concerns – Although the happenings in the middle east and specifically North Africa have an impact on the world economy as a whole, its impact is being felt more on economies that were already facing inflationary pressures. Indian markets which had started to stabilize after a severe underperformance since November 2010 have again corrected by nearly 5% since the troubles in Libya started. However I believe that spikes that are caused by specific events do not last very long and as such the nearly 15% spike in crude oil prices over the last 5 days is unlikely to sustain over the long run. The key will be to see the speed of resolution of the Libyan crisis. However given the fact that there is enough spare capacity available with other OPEC countries it is likely that crude oil prices will settle down soon. The thing to be monitored will be whether the troubles in the Middle East get contained in the countries where it is currently on or it spreads to others. The scenario might change in case of a wider conflagration. However as we saw after the start of the Iraq war crude oil prices came of sharply after an initial spike.

Specific to India the concerns have been around the various scams and the fact that there has been a slowdown in activity from the government on various policy issues and also project awards. Food inflation had also become a big concern. I believe that with the setting up of the Joint Parliamentary Committee on the 2G scam most of the India specific negatives seem to have peaked out. Most investors will be watching out for the moves on fiscal consolidation in the Union Budget and moves on boosting FDI flows into the country.

Food inflation has come off sharply over the last two weeks and should continue its declining trend going forward. There were a lot of concerns from the industry about environmental issues holding up projects and that seems to be getting addressed now.

At the ground level companies seem to be doing well but are concerned about the liquidity situation and the fact that RBI should not tighten too aggressively as it will not bring down global commodity prices but will surely lead to a compression in demand and economic growth.

Markets

Given the long term growth prospects of the Indian economy the current market presents an attractive entry point. Till six months back India was the darling of global investors and had got the maximum inflows in the year 2010. The beginning of the year saw most consensus forecasts for year end Sensex and Nifty at 24000 and 7400. Now following the market movements most people have come down to levels of 16000 and sub 5000 for the Nifty in the short term.

I believe that the markets would have bottomed out had it not been for the recent crude price spike and a correction in crude oil prices will lead to a sharp rally. The continued weakness of the USD in light of the crisis in North America indicates that the ri
sk trade is not unwinding at this stage. Since unprecedented events are hitting the markets the short term performance has become increasingly volatile.

However I believe that today we are at a point of time in the markets where if one is invested it is time to just sit back and not react to events on a daily basis. Mid cap company stock valuations have come down to extremely attractive levels and a large number of established and high growth mid cap companies are today available at single digit multiples. Similarly large cap valuations have also compressed significantly. Unless and until we see a big oil shock (an unlikely scenario) the markets should hold the panic bottoms hit a couple of weeks back.

It looks like a time to buy and hold rather than sell and go away.