Invest systematically

Collapses in the US housing market occur every so often and the tremors affect financial markets everywhere because the dollar is the reserve global currency. The last time (in the late 1980s), India was isolated. This time around, the effect is already obvious.

The ramifications of the US mortgage crisis are incalculable. It could blow over relatively quickly or it could take years to unravel and/or require a big bailout. The last one took several years and a bailout.

Fear of a repeat of the 1980s, (the Savings and Loan crisis as it was known) has caused a drop in the shares of Wall Street biggies such as Bear Stearns, Merrill Lynch and Lehmann. French institution BNP Paribas has injected a dose of panic by freezing redemption from three of its funds, which have subprime exposure.

The biggest players in the Indian markets are US-based Foreign Institutional Investors(FIIs) and they are liable to pull back to the safety of US Treasury Bills or Euro-bonds. An absence of FII money could mean months or even years of range-trading for Indian stocks.

The real economy could also see deceleration. Vast sums need to be invested in infrastructure over the next few years. It is difficult to see how these can be raised if the overseas tap dries up. Ports,housing, power and telecom are four areas where projects could run into major problems.

The subprime mess is also unfortunately, coinciding with a period when India's corporate EPS growth is slowing. Soon, both India and the US will be in full-blown election mode. which will inject Spolitical uncertainty as well.

On the currency front, a combination of factors may lead to a strange situation. The dollar will be under pressure so rupee appreciation could continue. However, inflows into India are likely to slow or reverse. That means less chance of domestic inflation caused by unbridled money supply. The RBI could then relax External Commercial Borrowing (ECB) norms and drop the Cash Reserve Ratio (CRR). That would allow interest rates to move down and maybe spark a domestic recovery.

In the circumstances, it would be realistic to expect little in the way of broad price gains until mid-2009. A weak market will drive all but the most serious players out. Most traders are only comfortable in a bull market and it is a difficult task to generate consistent profits on the short side if liquidity shrinks.

However, this is a wonderful scenario for a long-term investor. If you intend to buy and hold stocks over decades, surely you want an extended period of low prices? That way, you can accumulate savings and invest at leisure without fear of overpaying. It is the classic scenario of systematic investment "� average costs down as the market falls.