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Markets are ready to reward long-term buy

Posted by Yogesh on Tuesday, 7 October, 2008

To put the subprime issue in perspective, let’s look at some facts. The US mortgage industry, which was growing at 6%, accelerated to 10% in the past four to five years. Genesis of the same lies in the light monetary policies of Fed during 2001-2004, which resulted in excess $2 trillion mortgage assets being created.

At the current juncture, the $2.2 trillion subprime and Alt-A market has seen a wipe out of around $550 billion worth of assets and the US government’s $1 trillion bailout package has seen the nationalisation of Freddie Mac and Fannie Mae, which accounted for a major pie of the subprime market.

With this, we believe that a major part of the subprime issue has been tackled. The current situation compares to the 1989 crisis, when the government had extended a $745 billion (in today’s term) package for the beleaguered banking system. Consequent to the crisis, the US markets had declined by 20%. However, on resolution of the issue, it rebounded in six months.

Coming back to the Indian stock exchanges, we have seen year to date (YTD) FII outflow of $9 billion. With the US bailout package now in place, pressure on liquidity would ease and provide stability to the Indian markets. Other key concerns including crude and inflation have also been easing up, which would eventually lead to softening of interest rates and hence, provide a leg up to the markets.

Moreover, in spite of the liquidity crunch, the Indian economy is not dependent on external inflows on account of high domestic savings. A sustainable 32% domestic savings can easily drive an 8% GDP growth. India is also sitting on healthy forex reserves of $292 billion, which insulates the economy from any forex exodus.

On the valuation front, markets provide 10% earnings yield, which is attractive. Thus, after labouring pains of almost eight months, we believe that the markets are ready to deliver good returns to long-term investors. Source The Economic Times

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