Stock valuations look attractive to long-term investors who can bear volatility

As the annual results of most of the companies have already been announced and factored in, the markets will look at the onset of the monsoons and global economic factors for directions. The Met Department has predicted a normal monsoon, but on the global economic front there are indeed many minefields . How well the global central banks navigate through these minefields will determine the direction of the domestic stocks markets in the near future.

Negative news all around

Apart from South America, no other continent seems to be free from critical macroeconomic imbalances. The global factors clouding over the stock markets are the US economy's grow derailing, political crisis in the MENA region, calibrated slowdown in India and China, decline in GDP in flood-hit Australia, and the crisis of defaults in the Euro region.

The Euro zone is facing rating downgrades for its member countries. The one that is occupying the maximum mind-space of analysts is Greece. There is intense debate among analysts on Greece defaulting on its debts. The question that is now asked around is not 'if ' Greece will default on its debt but 'when' it will default. Credit rating agencies have downgraded Greece's bond ratings deeper last Wednesday. With Greece's debt outstanding touching USD 450 billion, it brought back memories of Lehman Brothers' collapse. Lehman Brothers' outstanding when they went bankrupt was to the tune of USD 600 billion.

European central bankers have a very difficult job on their hands. It they let Greece default it could trigger a chain reaction. All European banks that have lent to Greece will start defaulting, and this could end in another 2008-like situation . On the other hand, if they continue to bail out Greece, it could trigger protests in richer Euro nations due to wrongful use of taxpayers' money.

Domestic issues

The domestic markets also have to face a wall of worries . Inflation is showing no signs of decline. Rate hikes have impacted growth but not inflation. Corporate results show that growth is going to slowdown in the current year and earnings would be not matching up to last year's which were pretty good.

Companies are struggling with high input costs and rising interest rates. The investment sentiment had been severely dampened with the Reserve Bank of India (RBI) hiking interest rates by almost 400 basis percentage points. This has pulled down economic growth to the slowest pace in the last five quarters at 7.8 percent in the fourth quarter of the financial year 2011.

However, investors must understand that the decline in GDP numbers is actually a good thing. It's RBI's aim to cool the economy down to bring down inflation. So, a positive way of looking at these numbers would be to say the RBI's monetary policy measures are taking effect. Consequently, India along with other emerging economies, is somewhere in the middle or racing towards the end of the monetary tightening cycle.

On the other hand, if you look at the US, it will only begin to 'tighten' by letting the second phase of the quantitative easing (QE2) end in June, and then slowly start the rate hike cycle.

So, there is some glimmer of hope that economic macros could limp back to normal in a year's time for economies such as India. Further, the stock valuations here look very attractive to long-term investors who can bear some volatility along the way. These factors contribute to emerging markets outperforming other markets relatively in the near to intermediate terms. However, till the macroeconomic factors in other parts of the globe play out, it will still be uncertain times for the stock markets here.