The Myth About Economic Projections

The past fortnight has been a very interesting one. From a near warlike situation in the Russian sub-continent to the disappointing growth numbers for the economy, there was everything that could only be spelt as bad for the markets. The vulnerability of the markets to fanciful growth projections stood exposed during the past fortnight.

Every entity with an howsoever remote connection with the economy was trying to project GDP growth. After Moody’s came up with a sub 5 per cent growth number, it was the turn of a lesser known research firm Zyfin to throw a contradictory picture for the markets to savor. According to this firm, the Indian economy was expected to expand by 5.5 per cent in the third quarter.

Well, this reinforces the point about why you should not be reading too much into these estimates. Just to put things in perspective, no way can institutions, working on the same broader parameters and looking at the same fundamentals can vary in their estimates so widely. And hence it is better to leave these estimates out of the purview of investment decision making until the official numbers are out. After having danced to the tunes of various numbers thrown around it, the markets suddenly found themselves facing the crude reality of where our economic fundamentals really stand. From a supposedly weaker 4.8 per cent to an absurdly higher 5.5 per cent, various institutions were seen talking about how the Indian economy could look forward to a much better second half of the financial year. What came out was rather disappointing from all quarters. I have time and again warned about the suspect nature of economic projections. Relying on the same parameters and factors, the reason why different institutions should be coming up with different expectations is very baffling.

Moreover, nothing on the ground has changed so much as to warrant a decisive directional change in the fortunes of the economy. Whatever measures have been initiated so far, will yield results with a lag of time. This lag could well extend to anything beyond six to eight months. Also, one of the most important points to keep in mind is that we couldn’t just be looking at domestic factors. Global developments too are a major focal point today. Actions of the US Federal Reserve, growth in the Euro zone, geopolitical developments in certain parts of the world and of course our neighbor China play a very critical role in shaping the market sentiment at least for now. None of the above stated factors are stable. The Fed is talking the markets into volatility by coming up with the tapering issue while Europe is battling its own problems of growth (though there is some clarity emerging on what can be expected in that part of the world going forward).

China is fast coming to be a bigger worry on the economic front. Not all seems to be okay with that country. With the size that the Chinese economy is of and it’s cross connectivity with various parts of the world, even a slight problem in that country could result in an economic catastrophe. Talk of its Banking system facing major problems is keeping markets across the globe on its toes. India is no exception and will certainly face jitters if anything of that sort really unfolds. The basic problem with the Indian economy has been not its fundamentals. Those have remained quite strong through and through. But the power centres have been a major cause of concern. The need for a concerted and synchronized approach to growth has for long been the nemesis of the Indian economy. At a time when economic fundamentals are suspect and growth is only an illusion, the focus will completely shift on the upcoming elections.

While we discuss caution, here is another issue of Dalal Street Investment Journal which red flags a very important point pertinent to the times that currently are. Not everything that goes up is worth buying. You may see some stocks skyrocketing in the short run. But before you jump to add them to your portfolio, be remembered that these have a propensity to crash land from those dizzying heights. If you already have them in, you may well be discarding them from your portfolio now to avoid future pain. Our research and editorial team exposes six such stocks which defy fundamental reasoning in their rise and are driven more by the speculative tendencies in the markets. You should be careful while dealing in these, no matter how strong and convincing the selling proposition of your broker sounds. Th at brings us to the point of where you should be investing. With a pick up in the US economy the future of IT as a sector looks quite bright. Helios & Matheson IT is a mid-sized IT company which has been doing consistently well and is poised to gain further growth traction on the back of better days that IT companies are likely to see. Read the detailed analysis of what makes it a bet worth taking.

A revival of the textile industry looks beneficial for textile machinery manufacturer Laxmi Machine Works. The order book standing at Rs 3500 crore, lends immense clarity to its future revenues and growth prospects. It is our Choice Scrip recommendation this time. Read the rationale and invest from a one year perspective to gain from it. Another company to invest in is Mahindra Composites. At a time when the auto industry isn’t really doing that well, it may come as a surprise to many that we are recommending an auto ancillary company. But there are quite some good reasons, why this company is all set to do well going forward. That made it qualify as our Low Price recommendation this time around.

The issue rounds up with all our regular columns where our panel of experts talks to you through their heart helping build further conviction in your investment plans. Do write in to us on comment@dsij.in and share your thoughts on the quality and usability of our content. It helps us a lot in improvising further and building a strong product for your benefit.