LOOKING BEYOND GREECE

On Wednesday last week, the market snapped its eight-day rally. The immediate reason that triggered this sell-off was that international creditors had rejected Greek’s latest reform proposal. The proposal was submitted earlier on Monday to unlock much needed financial aid for Greece, the absence of which may lead Greece towards default on Euro 1.6 billion, which it owes to IMF on June 30. I have a rather different view on why the market corrected marginally on Wednesday. This fall had more to do with the imminent expiry on Thursday, which definitely made the market volatile. Moreover, market participants were booking profit after eight days of a continuous rally that moved the indices by 5 per cent.

Those who are following the Greece saga will acknowledge that this is not the first time a country has been so close to defaulting. There have been some other occasions too when market pundits have predicted the exit of Greece from the Eurozone with a probability as high as 70 per cent. Six years after the problem of Greece surfaced, we have not seen any impact for more than a few days on the equity market and there is nothing this time which indicates that it will be different. Furthermore, India does not have any significant trade relation with Greece; hence any default will have limited impact. There may be some indirect impact due to an intertwined global financial world, especially with derivatives such as credit default swap or CDS.

I believe every correction is a good opportunity for retail investors to enter quality stocks as the Indian equity market is poised to give you the best returns compared to any other asset class over the next five-year tenure. There were a few factors that led to the fall of the market from its recent peak and all those factors are now fast fading away. There was concern about the monsoon being weak for the second consecutive year; however, till June 23 it has exceeded the long-term averages. This also partially mitigates the concern about rising food inflation as better-than-expected monsoon rains have helped farmers in several parts of India sow cotton, pulses and oilseeds on time. The other factor that was weighing down the market was a hike in interest rate by the US’ Federal Reserve. Nevertheless, in its latest meeting, the Fed Chair, Janet Yellen, has not indicated anything to suggest that a hike in interest rate may be sooner. 
Hence, I do not find any strong reason why the Indian equity market should underperform. Some of you might argue that domestic conditions have not yet improved and the corporate earnings are yet to pick up. Some of the recent data shows that we are witnessing green shoots of economic revival. For example, indirect tax revenue (provisional) collections have increased from Rs 36,408 crore in May 2014 to Rs 49,993 crore during May 2015 - an increase of 37.3 per cent. This clearly shows that manufacturing activity has picked up. Similarly, many pending projects have also been given the green signal and this will surely help to revive investments. These factors will help companies to improve their earnings sooner than later.

The government is also trying its bit to improve the overall investment environment in the country. I see a pattern in the current finance minister Arun Jaitley’s nine day visit to USA, where he met US Treasury Secretary, foreign institutional investors and various industry stalwarts of USA. This visit will help India to attract foreign funds by allaying their concerns over tax issues and ease of investing in India. I believe this is this is his first of his visit and will make more foreign visits where Prime Minister Modi has visited earlier and has created ground work for more economic co-operation. Moreover, according to media reports government would not hesitate to convene a joint sitting of Parliament in case it falls short of numbers in Rajya Sabha on the land acquisition bill. Similarly in case of GST too government is willing to accommodate some of the concerns of state. Therefore, I do not see any reasons why equity market will not touch new high this year.

For retail investors who still worry about volatility in the equity market should definitely use mutual fund route through systematic investment plan to get exposure in the equity. Our cover story this time on mutual fund, which has seven recommendations, will help you in selecting right funds according to your risk profile. The story also talks about the best Fund Managers.

Elsewhere we have done two special reports one on monsoon and its impact and second on what you should be doing after the recent merger announcement of Cairn India and Vedanta.