ithougth market Wrap No. 42, 09 Aug 2011

Quick edit: We find it strange that everyone around us is using the short term Index trends to make long term investment decisions. At current valuations, people seem to be clearly missing the big picture. Clearly, near- term interest rates will hurt earnings. Indian companies have not built a strong investment pipeline after the nasty market fall in 2008-09. Their debt – equity ratios are low and rate shocks will hurt companies far less than they did ever before. The borrowings of companies have increased at a slower pace in relation to the growth in their own equity. Indian companies are therefore better placed for a slowdown than they were in 2007. Being underinvested gives a distinct advantage to companies. When growth returns, the capacity utilization levels will climb significantly and earnings velocity will rise quickly. Markets will climb sharply when growth returns to its previous highs. Slow and steady investing will clearly win the race for you.

Impact: Conviction on equities is running low among the institutions – domestic and Foreign. The retail investor continues to stay away. Retail is firmly focused on defensive investments like gold, bank deposits and capital protection schemes of mutual funds. Equity is the last thing on his mind. The markets are direction less & await the emergence of a consensus view among different classes of investors. In the absence of a consensus, we may well see a disproportionate amount of retail savings moving into defensive investments. This explains the clamor for gold in every form – physical, digital, ETF, biscuits, receipts and coins. That retail investors are chasing gold at its all-time highs overlooking the relative attractiveness of other asset classes is an ominous signal. If past experience of mob retail buying was an indication, one should be cautious about gold. But, for the moment, the mobs are buying at every dip.

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