Sustained rally hinges on interest rate direction

Oct 15 2012, 03:33 IST
Comments 0
SummaryIt would be fair to say that there is no simple answer to this question.

Unless there is a structural lowering of the cost of capital, it is difficult to see a long-term bull run sustain valuation

Tushar Pradhan

It would be fair to say that there is no simple answer to this question. I say that on three counts. One, the key consideration when offering advice on equities should be the risk profile and risk appetite of the questioner, which in this case is not available. Two, it presupposes that this is the only opportunity one can get to enter the markets, which again may not be a correct assumption. Three, as is the oft- repeated advice, equities as an asset class should be looked at from a long-term perspective, and “timing” the market is not necessary if you consider the asset class for the longer horizon. In any case, this is in my opinion, not the correct way to address exposure to equities.

Equities represent ownership in companies, made convenient by the stock market in a proportionate measure. Owners of any enterprise should know that meaningful gains accrue only over many cycles and that too if the business is well positioned, well-run by competent personnel and is highly profitable over up and down cycles. Thus, it will be well mentioned here that there is a difference between owning stock and renting.

If one wants to make use of low valuations (i.e. rent) in the face of a growing economy and, in turn, growing corporate profits, this is not the time to reap sustained gains since valuations are now in a “reasonable” range, but are not as cheap as a few months ago. The economic cycle which is on a downturn following various external (Eurozone) and internal events (sluggish growth in the face of high inflationary trends resulting in high interest rates) is not looking to rebound immediately.

So in both cases it looks to be a weak argument given what we know at this time. Is there a case for looking forward to see that things may indeed change very dramatically in the future? Well, to begin with the government appears to have seized the moment and is displaying great urgency to push forward major reform-oriented measures. While the same may be well intentioned, there is a healthy dose of skepticism that exists across participants at this time since these need to be passed to through a difficult process in Parliament.

Industry is reeling under the

Single Page Format
Ads by Google

More from Cover Story

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...