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Good time to invest in equity?

How bad things can get?

After hitting a low of 8167 on 9th march 09, SENSEX has jumped to 10,967 on 13 April 09. This is a return of 34% in a month, but this is the only good news I have heard in this time. Every other news related to economy does not look very encouraging. Starting from US where not many economists are sure that the stimulus will stimulate the economy or just be a drain on tax payer’s money. Now even car makers move closer to bankruptcy and asking for stimulus, no one knows which industry is going to be next.

Back home also things do not look pretty good. Fiscal deficit has gone up, current account balance has turned negative, and Tax mop up is less then expected numbers, which were already revised downwards. Exports have gone down by 33% and IIP numbers have shrank by .5%. The last quarter results did not offer any hope and this quarter is also not expected to be extraordinary.

Elections around the corner:

Market movement will also be determined by election results in India. It looks certain that we will have a coalition government and a few regional parties might support this new government from outside. A lot will depend on who is supporting the government, and what is the common minimum program of the parties. Like the current government if they also refrain from disinvestment and liberalization then we may see a negative impact on the market.

Glimmer of hope:

Inflation (WPI) is touching near zero level, which generally is not very good news for economy. But this time it looks a bit different. If one analyzes the numbers you realize that inflation may be zero and going down but the biggest reason for the same is correction in the commodity and crude prices, which will help the economy. as this will help reduce the input cost. For example construction cost for one sq. ft. has gone down from about 1200 Rs to 600-700 Rs. The same is true for all the industries using commodity as a row material. This will help reduce prices and increase margins. Only caveat for the investors is to move their portfolio from commodity producing companies to users of commodity like Auto.

Interest rates are correcting may correct further:

Interest rates have come down, central banks have reduces all the benchmark rates. This has led to a reduction in PLR of most of the banks, and changes are that it may further go down. This will reduce the cost of money, liquidity will be readily available. This will make most of the projects viable again and work will start on some of the projects which are stuck because lack of funds. Infect we have already started seeing some improvements on this front. Back to back price hike by cement companies is a good example of a robust demand for cement. This indicates a revival in construction and real estate companies as well. Auto numbers also indicate a robust domestic demand. Also RIL’s has commenced gas production from KG basin, which will save India almost $9 Billion per year. This should help fiscal deficit and reduce dependency of the international crude oil prices.

What should investors do?

All the points mentioned above will drive the SENSEX EPS numbers and smart money will start coming in. I would not suggest taking aggressive bets in the market right now, but fundamentals have started improving and I suggest a SIP would be a good approach to the market from here on. After all it’s not possible to predict the bottom of the market.