Markets are correcting. What to do?

Anyways, in a sharp turnaround of sorts, Indian markets were trading with gains at the time of writing. From being down around 265 points at one time, the BSE-Sensex recovered smartly. At the time of writing this, the Sensex was trading higher by around 100 points (0.7%). IT and realty stocks led this sharp upward move of the markets today. Other key Asian markets closed in the red, with losses seen in Hong Kong (down 0.6%) and Japan (down 1%).

As for the Indian markets, we at Equitymaster believe that after the sharp rise in stock prices in 2009, some uncertainty (correction) this year should be expected and not feared. Investors will do themselves a world of good by treating corrections as just a normal part of stock markets that will not do much in altering the long-term bull market that is India.



What would an economy be left with if the government encourages land prices to go up 10 times in 10 years? A property bubble would be the simplest answer. But for the Chinese economy, the problem is much deeper.

As per economist Andy Xie, more than 50% of the fiscal revenues of the Chinese state governments depend on the sale of land for new construction. Little wonder then that the banks have been induced to lend for purchases of the third and fourth houses by Chinese households. This has made new properties in China almost 100% overvalued, says Xie. Although the Chinese central bank has now resolved to tighten its monetary policy, the impact would be in terms of bringing down loans from 20 trillion yen last year to 17 trillion yen this year. Although significant in absolute terms, Xie believes that the tightening needs to get more aggressive. Otherwise, the Chinese property bubble could well go out of control.



Marc Faber is at it again. One of the most vocal critics of the US Fed's expansionary policies has once again argued that the US could default on its debt obligations or monetize debt and reduce it through massive inflation. "I'm convinced the US government will go bankrupt, but not tomorrow. And before they go bankrupt, they'll print money, and then you get high inflation rates, you have a depression and eventually they'll go to war," Faber is believed to have said in his most recent report.

And as a natural corollary to this scenario, Faber backs precious metals like gold as amongst his most favored investments. As he advices, "The risk is really not to own any precious metals at all."

Thus, while gold could be going through a bit of a lean patch currently, it might just be a temporary phenomenon and it is only a matter of time before it returns to its trend of being in a long-term bull market!



An interesting article in a leading business daily points out to the fact that it is not true that oil price deregulation will stoke inflation. If anything, it will lead to efficiency in consumption and a greater search for alternatives. In fact, there was a time in India when steel was controlled and oil was not. When steel was subsequently decontrolled, the market adjusted. Sooner or later, crude oil prices will start their march towards the US$ 200 per barrel mark. On the supply side, hardly any major oil reserves have been discovered in the last several years.

In our view, no matter which way you look at the future of crude oil prices, it is clear that prices of the commodity are headed upwards. The recent Kirit Parikh Committee recommendations will help us deal with that scenario. The question is - will politicians bite the bullet. After all, this is the third such committee. At some point, they will have too. Imagine the amount of subsidy burden if crude prices touched the US$ 200 per barrel mark. It would be wise for us to make systemic changes much ahead of that eventuality.


Today's investing mantra
"If you have trouble imaging a 20% loss in the stock market, you shouldn't be in stocks." - John Bogle