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Selective Infrastrufcture And Related Stocks Have Potential

Monday, November 11, 2013
By Clifton Desilva

Clifton Desilva is an investment expert and a Director at Altina Securities.

Over the Last five years or so the stock markets have been very volatile and huge swings have been witnessed based on news flows either negative or positive.  Looking back the Indian stock markets achieved a life time high on 8th January 2008 with the Sensex placed at 21,207 and the Nifty at 6357.
However soon thereafter the mood reversed and the indices touched an all time low on 27th October 2008 with the Sensex at 6300 and the Nifty at 2250 a fall of 70% in a short span of just 9 months time. The sharp fall was attributed to woes faced by US, like the sub-prime crisis and the subsequent collapse of Lehman Brothers, apart from where several investment banks had to be bailed out. Thereafter the outlook turned positive with the Sensex touching 20,965 and the Nifty 6307 on 5th November 2010. Soon thereafter the mood turned sour again with a host of scams, like the Commonwealth game scam. The 2G Scam etc. hike in interest rates, policy paralysis to name a few... At the international level the euro zone crisis further dampened the sentiment and on 20th December the indices touched lows with the Sensex at 15,175 and the Nifty at 4544. Thus over the last five years the stock markets  in general have not generated any returns to investors though some select stocks in the large cap segment have generated huge  returns while on the other hand   many mid cap and small cap stocks have depreciated by more than 100%.

The scenario was due to slow down in consumption driven by persistent inflation. Investments were hit by high interest rates and policy paralysis. Both borrowers and lenders became risk averse because of governance concerns, delays in approvals and tighter credit conditions. For lenders, risk aversion was the result of the erosion of asset quality, deteriorating cash flow situation of borrowers eroding their credit worthiness and heightened risk premiums
Over the past few years, the RBI tightened monetary policy to curb inflation. The policy rate (repo) was raised thirteen times between March 2010 and October 2011, involving an increase of 375 basis points from 4.75% to 8.50%. The RBI took a pause after October 2011, in line with the decline in WPI inflation from 10% to below 8% and the sharp decline in output growth. It cut rates by 50 bps in April 2012 and lowered rates twice by 25 bps on each occasion in January and March 2013.

After Mr. Chidambaram took over the finance ministry the outlook once again turned positive as a few reforms were initiated in the form of diesel price hike, FDI in retail, the pension bill, the land acquisition bill etc.

After September 4, once the new Reserve Bank Governor took over the sentiment turned positive once again. Over the last five years or so the stock markets world over have been very volatile due to the uncertainty prevailing. However, over the years most of the governments have been addressing the problems and it now looks like that stability is taking place in the markets. With the GDP touching a  low of 4.4%  in the first quarter it appears that the Indian economy is bottoming out and going ahead the outlook looks more promising, albeit uncertainties on the US tapering, the outcome of the state and general elections.

At the same time recent trends suggest that headline inflation is coming down driven by softening of global commodity prices and as inflation comes down, it will create more headroom for RBI to cut rates which in turn will result in boosting spending (Capex and Consumer).

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