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| Investing: Paras Adenwala |
| Business Standard / Mumbai Feb 04, 2010, 00:03 IST |
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Will it be prudent to buy sugar stocks after the correction in the last few days? What would be the holding period if I want to play in this sector?
The global decline in sugar production due to cane scarcity has catapulted sugar prices to an unprecedented high. The rise in prices has been significant enough to contribute to the alarmingly high food inflation. Consequently, the government has stepped in to soften the prices. Hence, while the global demand-supply mismatch indicates continuing strength in sugar prices, the government measures, locally, is likely to ensure a muted rise in prices. Sugar stocks, therefore, at best, may show a technical rebound. Investment buying is not recommended at current levels.
Despite the hike in the cash reserve ratio, the Banking Index of the Bombay Stock Exchange has ended positive. I am particularly interested in public sector banks. What sense should I make of the current rise, especially post the credit policy?
The credit policy has been quite a balanced one under the circumstances. Excessive liquidity and inadequate credit growth have forced banks to park money with the central bank and mutual funds, at returns which are lower than the returns from the business. This has resulted in some pressure on their profitability. By increasing the cash reserve ratio, the central bank has mitigated this problem of excessive liquidity. As credit growth picks up, banks should benefit from this policy move. Just a caveat here, any increase in interest rates may impact the profitability of banks in the short to medium-term, until re-pricing of assets is done. Well-run public sector banks, that are available at bargain prices, could be considered for investment with a longer-term perspective.
Do you see a correction in gold prices? I want to invest in gold, but the volatility discourages me. Reports suggest that gold is facing a price bubble. Other than exchange-traded funds, are there other better ways to invest in the commodity?
Gold prices have rallied well in the last one year. This is due to huge injections of liquidity accompanied with dollar weakness. This equation has changed a bit in the last month, due to dollar staging a strong comeback. However, with doubts lingering on the prospects of the US economy, the dollar rebound may be short-lived. The only other thing that finds global acceptance besides the US dollar is gold. Hence, it is not surprising that several central banks, including RBI, have shored up their gold reserves recently. The demand for gold is expected to remain robust over the long term. But like any other commodity, the prices would be volatile. For those, who wish to invest, this volatility should not really matter. A gold exchange-traded fund, in our opinion, is the best way to invest in this commodity.
Paras Adenwala is the managing director & principal portfolio manager of Capital Portfolio Advisors.
Send your queries at yourmoney@bsmail.in
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