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Is it Time to Quit Equity?

Weak global cues, a faltering U.S. economy, soaring commodity prices and rising inflation have painted a grim view of the equity market

The picture is certainly gloomy and has gotten worse over the past few days. And with Friday the 13th approaching, the superstitious will not expect any good news this week.


The bulls were thrashed on Monday morning with the Sensex plunging by 513 points. It was to be expected when Asian indices were trading in the red before we opened. European markets which opened after India were also trading lower. On Friday, the U.S. stock market slumped after the May jobs report showed a jump in unemployment to 5.5%. The unemployment rate is said to be the highest in more than 3½ years and it is the sharpest one-month rise in U.S. unemployment in 22 years.


Oil prices soared to over $134 a barrel while gold climbed. The dollar declined against other major currencies - a move that makes each barrel of oil more expensive. The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar. The hike in crude was not only due to the dollar declining against major currencies but also because of the sabre rattling between Iran and Israel. Iranian president Mahmoud Ahmadinejad has said that Israel is "doomed to go." Israel transportation Minister Shaul Mofaz retaliated by saying that Ahmadinejad "will disappear before Israel does." Mofaz has said that Israel will have “no choice” but to attack Iran if it does not stop its nuclear programme. And then there was the Morgan Stanley forecast that falling U.S. crude oil stockpiles could push prices to $150 a barrel by July 4, 2008. Citigroup economist Rohini Malkani was quoted in the press as saying that at oil with $135 a barrel, India's current account deficit will be 3.9 per cent of GDP, but will rise to 4.7% if oil goes to $150.


In India, the hike in crude is bad news. The recent hike in retail fuel prices and the issue of bonds was done at a price of $123 a barrel. So the government's measures may not be of much help if crude continues to climb. And it will certainly not consider another fuel price hike given the amount of controversy it has to deal with. A weakening rupee, coupled with a deteriorating fiscal situation, rising inflation, and rising interest rates pose a big challenge on the macroeconomic front. Most analysts see the Indian economy expanding between 7 - 7.5% through 2008-09, compared with 9% last year, while growth in corporate profits will slow to 155. A report by Morgan Stanley says that the three main risk factors to India's growth are the rise in commodity prices, strengthening of the U.S. dollar and global risk aversion.


But if you are thinking of pulling out of your equity investments, hold on. In A Positive Out of the Many Negatives, Dhirendra Kumar tells you how you should plan your investments in such a scenario.