Long term investors can continue to buy on correction

The next two years could be the right time to enter the market for the long-term investor.

The political pundits have very mixed opinions about the UPA's track record on the governance and reform fronts. But there are no two opinions that it has been in charge through the biggest bull market India has ever seen. In May 2004, when it took charge, the Nifty was trading at 1300 levels after a panic collapse. In December 2007, the Nifty is above the 6000 mark.

The UPA can scarcely claim much credit for this since it has essentially done very little. There hasn't been much movement on any policy front except for the SEZ fiasco (negative) and the VAT reforms (positive). There have been a series of anaemic Budgets and consistent foot-dragging on reforms. However, the momentum has been strong enough to drive market returns. I suppose one must give the UPA credit for not doing anything spectacularly stupid. That has been enough to encourage foreign institutional investors (FIIs) who have come in record numbers seeking returns in emerging markets. In the last year alone, FIIs have pumped over Rs 68,000 crore into Indian equities. That has dwarfed the Indian mutual funds, which have been net buyers to the tune of about Rs 5,400 crore in the same period.

There are clouds on the horizon. Global liquidity in the next year could be uncertain because of the fallout from the subprime lunacy. The Indian growth engine is also running into capacity constraints. And, a change in the political equations is likely to happen fairly soon.

Any one of these factors could induce a sell-off in the stock market. Given the presence of all three, a major correction in asset prices is almost guaranteed. Either calendar 2008 or 2009, perhaps both years, may be bearish or see periods of bearishness.

Should one read this as a threat or an opportunity? It is actually both. To take the factors one by one, India isn't decoupled from global markets but it is better insulated than most of East Asia because it does have a large domestic market. If the US goes into recession, India could be viewed as a haven by a certain class of foreign investors. There are huge investment opportunities in India including long-term infrastructure projects that will continue to attract funds.

In terms of corporate earnings, there are two factors that need review. India Inc. is continuing to build capacity so constraints will not be a factor for very long. There may be a one year period of slower growth in earnings and turnovers but capacity will catch up with demand, sooner rather than later.

The second factor is that the consumption-investment mix of the Indian economy is changing. Two years ago, perhaps two-thirds of GDP growth was driven by consumption. Three years later, it will probably be less than 50 per cent. That change is already reflected in the manner in which smart money has moved out of perennials like FMCG and into core sectors such as power.

The political factor is the most difficult to assess. One can state with a high degree of confidence that the next general elections will put a coalition in charge. However, the shape of that coalition is impossible to predict. In the short-run, political change will have a negative impact on prices. If there is a Deve Gowda-Gujral situation of fast-changing ineffectual governments and accidental PMs, there could be a long-term bear market.

However, if the UPA and its successor leave plans that are already in motion alone, growth is likely to continue. Over the next five years, infrastructure capacities in almost every sector are set to double, in certain cases, nearly triple. In most cases, autonomous regulatory authorities are in charge. If the NHAI, the TRAI, the new PNGRB, the TAMP, the yet-to-be-installed air regulator, etc are allowed to perform their tasks, a change in government won't matter that much. In practice we all know that there will be some political interference but ideally, it would be minimal.

This is why there is a real opportunity for the long-term investor. If you intend to stay invested for a decade or more, surely you would like to start with a couple of years of depressed prices and continuing growth? That's when you can create your base portfolio. I think the way that things are panning out, 2008-09 could be that period.