Euro Crisis: Impact On India

The adage that America sneezes and the world catches flu held true in 2008.It was the huge subprime crisis in the US that triggered the last recession and engulfed the world; this time around it is the countries in Europe which are sending shivers. Enough has been already spoken and written about the Euro crisis and its causes, but my concern is with the impact it has on us.

Firstly it’s affecting us through the monetary route as euro is losing value, dollar is becoming more expensive. This, in turn, means Indian currency is losing value against dollar. Our large trade deficits, resulting from imports being far greater than exports, have made the things worse as the trade is funded with large buying of dollars. One of the main reasons for the last petrol price hike was the fall in rupee making imports costlier.

Secondly, hike in the interest rates by the RBI as a counter inflationary measure has already jeopardised Indian industry and led to a slowdown in credit off take from banks. The purpose of taming the rising inflation was not served but it led to a further slowdown in investments and industrial growth. Growth in industrial production slipped to a 21-month low of 3.3 per cent in July 2011. The country’s economic growth also moderated to 7.7 per cent during the April-June quarter this fiscal, the slowest growth in six quarters.

The market has already slowed down. When the economic growth slows down, a country also becomes unattractive for investment. No wonder the foreign direct investment (FDI) in the country has dropped significantly in the last few months and the stock markets are seeing flight of foreign capital as the FIIs are selling their holdings in hoards. A slower growth would mean lower asset prices and lower income growth. On the positive side, the commodity prices will come down. A beginning perhaps has already started which will bring down inflation and may allow RBI to cut rates. Lower rates will help demand and may allow growth to stabilize. Investors in equity and equity-related products will have to be very careful of what they are buying, while domestic debt investors may choose to lock into higher yielding safe products as interest rate may fall sharply. Now in such a scenario what should an investor do? My sincere advice is to remain invested. However should you decide to buy or sell; here are some simple rules which should help you in this regard.

1. Do not wait for the highest price.

Obviously you would want the best possible price for your shares but how would you know that a particular share has reached its peak? Sell as soon as you have made adequate profits on your investments. Most successful investors get excellent returns by buying and selling in intermediate range prices.

2. Sell a share when your target price is reached.

When you buy the shares of a particular company, you do so with a certain goal in mind. For example you may have bought some shares with the intention of doubling your investment in two years. I suggest you sell the shares the moment you reach, or cross your target. You may fee that you have missed out on the opportunity of making more money if the prices continue to rise; however, you should also keep in mind the converse possibility.

3. Once you realise you have made a mistake – sell!

In such a situation sell your shares immediately, even if it means incurring a substantial loss. There is no point in holding on in the vague hope that things may eventually improve; wishful thinking is not the way to get rich in the stock markets. Understand the importance of cutting your losses.

4. Make use of P/E ratio to assess share prices.

The price earnings ratio (P/E) expresses the relationship between the market price of a company’s share and it’s earning per share. In other words it’s a reflection of the market’s opinion of the earning capacity and future business prospects of a company. Companies which enjoy the confidence of the investors and have a higher market standing usually command high P/E ratio.

5. Check previous year’s highs and lows

The highest and the lowest prices recorded by a particular share in the previous year are helpful in providing a frame of reference for judging its current price. If you pick up a sound growth share at around its previous year’s lowest price or even at previous year’s average price then chances are that you are buying it at the right price.

6. Understand booms and recessions.
Booms and recession are cyclical phenomena; neither lasts forever. A boom means that the economy has over extended itself and a correction in the form of recession becomes due in order to restore the balance. A boom is the time to sell the shares and a recession is the appropriate time to buy at cheap prices. At such times most shares are grossly under priced, so almost any share you buy will give you an excellent return on investment once the economy pulls out of the recession. More on this would follow later; till then happy investing!! Stay Blessed!!