The Bharatiya
January 25, 2016
Bad times in equity markets will pass
Bad times in equity markets will pass
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Raghu Palat
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Chinese philosopher Confucius once said, “May you live
in interesting times”. These are interesting times without a doubt,
especially for those who invest in stock markets because the volatility
of the markets must be sending them in a tizzy with the question –
should we hang on or should we divest?
Let’s look at the facts.
The Sensex has fallen from a high of 29682 on January 29, 2015, to below
24000 last Thursday, only to recover 473 points to close the week at
24435. What we should do is to look at the reasons for this fall and
then decide on the next course of action or inaction. The fall has been on account of three major factors. First of all, crude oil price is plunging. It is now at its lowest levels since 2003 and one of the reasons is the International Energy Agency opining that the global oil market could drown in oversupply. However, there is a positive too because falling oil prices would mean lower import costs that will cut inflation. The second reason is China, which has been the economic engine for global growth for two decades. Now, its growth is the lowest in 25 years. Fear of an overnight Chinese sell-off has punctured global optimism and caused global markets to fall significantly. Confidence is extremely fragile at present. As there is global uncertainty, foreign institutional investors are selling rapidly. This month sales of shares by FIIs have been over Rs 7,500 crore. Money is being pulled out of emerging markets rapidly. However, I believe the statement of the governor of the Reserve Bank of India that ‘China not falling off the cliff’ should be heeded. He says that the Chinese authorities should be taken at their word when they say that they are not deliberately depreciating their currency. Within India, though the finance minister speaks with confidence on the economy and that India can grow at 8-9%, there are concerns that exports have been weak and corporate earnings have not taken off. In addition, there have been delays in reforms and long awaited legislations such as GST. Also, the rupee has fallen against the dollar quite substantially. It is important to realise that markets rise on perception as do individual shares. When Narendra Modi came into power markets rose in anticipation of huge reforms. However, due to delays and uncertainty of when these reforms would happen the markets fell. I believe that even if the crude oil price is falling and China is in the grips of an economic crisis, the Indian markets would be rising if reforms are being made and overdue pro-growth laws are passed. It is all about perception. In this scenario let us look at the Indian investor. If you had invested in good, strong companies and you have invested for the long-term using your own savings then you should sit back and not worry. There is no need. As a wiser man once said, “This too will pass.” If, on the other hand, you have borrowed in order to purchase, it would be prudent to sell shares of those companies that are not intrinsically strong as they are likely to sink faster and take more time to rise in price. Punters and pundits are of course yelling for all those wishing to hear that this is a great opportunity to purchase shares. That is true if you have the money in hand to invest and are prepared to wait till the market once again becomes optimistic, which may take a while. However, do not borrow to buy. Buy only with the money you have to spare. Do not buy shares that are speculative. Leave the small caps alone. The writer is MD, Cortlandt Rand, and an author |
