What to do in such confusing times?

Mon, 8 Mar Pre-Open

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Global stocks markets had a strong last week. Even Indian markets performed well in this first full week after the Union Budget 2010. As we look forward to the next few weeks, the markets will be driven largely by expectations from the March quarter results that will flow in from the second week on April. By the way it seems as of now, most investors will be expecting a continued improvement in India Inc's profitability driven by higher sales and lower costs.

The benefits of the government's fiscal stimulus have already been seen in improvement in performance of some sectors like automobile and real estate. Now the biggest point of concern for these sectors is the complete withdrawal of stimulus measures that can otherwise spawn high inflation in the economy. The recent Economic Survey had anyways warned about the food price inflation to spill over to other sections of the economy. A delay in withdrawal of stimulus can make this a reality sooner rather than later. But then an early withdrawal of stimulus can dent the economic recovery that is still in its early stages. Therefore, there is confusion all around whether an early stimulus withdrawal will be good or bad for the economy.

That's the Indian story, which is still sane as compared to world standards. Coming to the US, there is no doubt that an early withdrawal of stimulus will really hurt their economy. This is considering that the broader US economy remains weak if one were to go by their unemployment numbers. In light of this, some like the former Fed chief Paul Volker believe that this is not the time to take aggressive tightening action, either fiscally or monetary. The belief there is that the US economy still requires a lot of time to come to terms with a recovery. So it will be unwise for policymakers to unwind the stimulus that has helped the world's largest economy to survive what many had believed to be a repeat of the Great Depression of the 1930s.

Anyways, Indian or global, one place that has been the biggest beneficiary of the cheap money floating all around, is stockmarkets. And more so in the emerging nations of Asia. Indian markets are a clear case in point. Of course, India was amongst the least impacted nations from the crisis that hit the world in 2008. But the impact was still there. Companies here also had to cut back on their investments as demand stalled and profits went for a toss. Then, some that had made aggressive global acquisitions and had taken rapid growth strides during the heady times of 2007, were left with devastated balance sheets.

Even as we stand today, lot of these companies are still facing balance sheet issues. Their sales have yet to revive and profits owing to massive cost cutting merely seem a mirage. But see their stock prices! Some have multiplied 5 times since March 2009. Some even more! Even when one is to look at the broader markets, valuations do not look cheap anymore. In fact, there are more overvalued stocks in the market than ones that can be called 'fairly valued'. Forget about the category of ‘undervalued' stocks as these have become very difficult to identify.

In such times, it is important for you - the investor - to be very careful in your stock selection. Buying stocks because everyone else around you is buying, can be highly risky. While you can still search and find some good long term opportunities even as of now, always remember to double check the background of such companies and their promoters, and their past financial performance. Stocks that might appear cheap might not necessarily be bought. These have to be studied very carefully before an investment decision is made.