Thursday, April 3, 2008

Capital Preservation - Priority No. 1

My advice to investors is to approach the current year (FY09) with a bit of caution & keeping capital preservation in mind.
  • Inflation is on the rise & the Govt/RBI may take several decisions which might impact corporate performance one way of the other. Both frind & foe (Left & BJP) are going on the offensive on this & a knee- jerk reaction from the Govt is not ruled out.
  • The FM has conspicuously lowered his growth projection to 'around 8%' and made it clear that he is willing to sacrifice growth to keep inflation in control.
  • Expected reduction in interest rates will certainly be on hold for longer than anticipated, and there is a chance that it might even be reversed, even as the lag effect of previous rate hikes might start reflecting in bottomlines.
  • Impact of Pay Commission recommendations on Central & State Govt finances, and also on that of PSU's indirectly, needs to be looked at closely. So also, the write-off of loans announced in the last budget.
  • The Global situation is still volatile, and could continue to impact our market in the short to medium term.
  • Forex Derivative-swap losses are coming out of wraps & even corporates with good standing seem to be affected. It has now become mandatory to disclose such losses & provide for them immediately, else auditors have been asked to highlight the non-provision in the notes to accounts. As many company's will not be declaring unaudited Q4 results & directly declaring audited full-year & Q4 results by June 30th, suspicions on this account could linger till then .
  • Monsoon is due in a couple of months, let's see if the trend of good monsoons for several years now is maintained.
  • Post monsoon, if inflation is under control, elections will be on the horizon, at which point of time market players may keep positions light.
  • Down the line the impact of FCCB's coming up for conversion or repayment, where the market price is at a steep discount, will also have to be seen.

Despite all the above, one also has to keep in mind that bear markets are basically manna from heaven for the long term investor. So continue to look out for & add stocks which you feel are going abegging at much below fair value, and which you expect will give excellent returns if held for 2-3 years or more, state of the markets notwithstanding.

I would also recommend that this period of lull can be utilised well by investors to read the investment classics & try to learn from them and rectify mistakes going forward (it is never too late), so that one can be a better and more disciplined investor going forward.

- ZeeNut