More of time correction than price correction

The recent events, both global and domestic, have been turbulent, to say the least. The Japanese twin natural disasters, though a tragedy, should have minimal impact on our markets. Japan has some rebuilding to do.

Due to reduction in steel production, commodities should soften for a very brief period and then revive, but all in all, it should not affect long-term contract pricing. Indian commodity exports to Japan are small and this event should be largely neutral for Indian companies.

Some concerns did emerge for certain companies, particularly on issues like Yen exposure, hitches in sourcing raw materials and components and subsequent expansion delays. The Yen has settled down a bit. That may rest a few concerns. The Bank of Japan’s liquidity injection has helped calm the currency and money markets. Outflows from India, therefore, should be moderated to that extent.

Crude oil prices are a greater concern. The West Asian crisis, first of its kind, has opened a scenario of various permutations, though the crisis is systemic in nature and may not die down easily. Speculative interest in oil is much more than the previous time in 2008. Add to this a possibility of further spike due to military action in Libya and threat to oil routes, oil may stay elevated for some more time. This would affect us by widening our fiscal deficit and ballooning underrecoveries. The Budget made a rather modest provision of Rs 24,800 crore for subsidies in 2011-12, which could be inadequate. The only silver lining is Saudi Arabia and other Opec members are ready to increase production if the situation so warrants. Unwinding of positions could happen if there is some semblance of stability in the region. Also, we have seen this high price scenario in the past and have emerged out of it. It will be a setback, albeit temporary in nature.

With high commodity prices, inflation continues to remain sticky. Corporate number downgrades may start filtering in by the Street. Our market has corrected and valuations, if not dirt cheap, are comfortable. The structural story remains intact. The key thing people are waiting for is the capex cycle to pick up, which is being delayed due to high interest rates, which may continue for some time.

In the interim, macro headwind clouds are present, which may only dissipate by the second half of 2011-12. The silver lining is that the structural India story remains intact and stocks are available at reasonable valuations. This is more of a time correction than a price correction, so a long-term approach to equity would help get positive returns. The average investor may be better off not trying to time the market, but rather own the space through investing in blue-chips or buying index funds systematically.

The author is the MD & CEO of IDBI Asset Management and the views, opinions and expressions made in the above article are in his personal capacity