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BW Businessworld

Inflation And Confidence Deflation

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It doesn't take much to see that investor confidence in the equity markets has waned somewhat. Just look at traded volumes and the stockmarket indices: better yet, ask your neighbour. What the seventh wave of the BW-JP Morgan Asset Management-Value Notes Investor Confidence Index (ICI) survey shows, however, is that this confidence began declining long before, perhaps as early as at the end of 2010 (the latest wave covers the quarter till March 2011).

Overall investor confidence, on a scale of 0 to 200 points (0 is completely negative, 200 reflects full confidence, and 100 is neutral), and as some of the accompanying graphs indicate, fell by 10 per cent in the quarter ended March 2011, compared to December 2010. All three categories — retail investors, corporate investors and financial advisors —that are sampled for the ICI expressed a decline in confidence, albeit to different degrees.

Oddly enough, the survey suggests that the decline in confidence is not at the micro-level, or in corporate India's financial performance, but at the macro level; the supreme faith in the India growth story has been dented substantially, and among all economic indicators, inflation has become a serious worry.

Most people, one would imagine, do not see stocks and bonds as being the same; inflation can hurt bonds badly because inflation forces interest rate increases, and consequently hurts bond values. Stocks, on the other hand, are driven by earnings expectations, and across a broad swathe of companies, earnings expectations have largely been met.

But investors have become savvier; they recognise that rising prices may have inflated revenue numbers. The survey also suggests that investors have also made adjustments to their investment horizons. If the medium term in the past could have been 18 months, it now ranges between three to five years.

Future outlook has also been tempered. Most investors believe disposable or discretionary incomes may not grow as much in the next six months; and they don't expect much increase in their investments either. All kinds of investment have been hit: savings and time deposits, insurance, stocks, and even gold. Activity in mutual funds and time deposits has been worse hit.

And confidence is not expected to return to previous levels very soon. The policy-making community — led by the Reserve Bank of India — seems to be saying that growth will ‘moderate', but many fear that it could be by more than a little. By how much, perhaps the next wave of the ICI will tell us.

Click here to view 'Zeroing In On Money Markets'

Click here to view 'Conservative Call'

Click here to view 'Future Positive'

(This story was published in Businessworld Issue Dated 23-05-2011)