SHOCK AND AWE
They call themselves â€˜expertsâ€™, â€˜financial analystâ€™, â€˜financial wizardâ€™ and even the most reputed names in the field advising but the markets proved them wrong one time or other.
It is not like a science theory or technical expertise like 1+1=2. Markets change trends for infinite number of reasons but financial investors can work based on some identical situations of the past.
Be careful about what you ask for, because you might just get it! Every equity analyst, fund manager and the so called â€˜market expertâ€™ has been craving for a â€œhealthyâ€? correction ever since we saw the Sensex cross the 10,000 mark.
THE CORRECTION â€“ WHY?
Since the beginning of this calendar year, the Sensex has risen by more than twice the amount that any other emerging market index has. While increased volatility gave us one all â€“ time high after another, valuations begin to matter lesser and lesser. The market rally became increasingly a liquidity- driven technical rally as opposed to a fundamentally driven rally. Everybody expressed apprehensions over the giddy rise.
The last few straws were,
Â· Rising inflation in the developed markets: With the inflation on the rise, global interest rates were expected to continue their northward journey. In such a scenario, India was viewed as a â€˜less attractiveâ€™ investment destination. FIIs therefore started to pull-out money. It has been reiterated over and over again, that FIIS are the ruling force in the Indian capital market, and any pull-back from their end would make the market undertake a southward journey.
Â· Melt- down in commodity prices: As a result of the above fears, commodity prices witnessed a global decline. Base metals such as Copper, Aluminium and Zinc were the worst hit.
Â· The Central Board of Direct Taxes Circular: The innocuous looking CBDT circular was misunderstood as indicating that the income earned by Foreign Institutional Investors from the Indian stock market would be treated as â€˜business incomeâ€™ (as opposed to capital gains) and would therefore attract a higher rate of tax.
Heightened volatility harms the retail investor the greatest, as he does not have the risk appetite to digest huge falls or the wherewithal to enter the markets after making huge gains. Huge correction was imminent when the market was scaling peak after peak. Therefore a stable situation is also imminent at the end of this volatile phase.
The best idea is to keep your cool and not allow the manic Sensex movement to get you to make impulsive decisions. The wild swings in the index may have a short- term impact on the trading sentiment, but are no way repelling the strong growth signals that India is still sending out to the world at large.
Fundamentally strong stocks in the portfolio have to bounce back. Good stocks that you now want in your portfolio that are currently volatile have to stabilize. Averaging your past purchases in the market like this is beneficial. If you try and predict the market in this phase, you will be making the same mistake that nearly cost you most (if not all) of the gains you made over the past 3 months.
Large-cap stocks and stocks that constitute the Sensex are â€œsafeâ€? stocks, as they have the advantage of attracting larger volumes and hence are bound to appreciate in these times. Therefore if you wish to enter the capital market now take an exposure to these stocks. A madcap or a small-cap stock that has taken a beating is less likely to recover as fast as a large â€“ cap stock, as it will take a while for the investor confidence to return to it in volatile market.
Speculative â€˜hot moneyâ€™ may flow in and out of India but the strong growth momentum in India Inc. (arising from multiple factors ranging from robust domestic consumption to a healthy capital expansion drive) is hard to de-stabilize. This correction was a grim reminder for the undisputable fact that itâ€™s never easy to make money in the capital market. Despite all this, equities still remain the most viable and sensible long-term investment option. A carefully selected portfolio of stocks is capable of delivering high double digit returns over a minimum investment horizon of 3 years. Going forward, the market will always continue to offer great long-term opportunities to the fundamentally driven investors.