October 27, 2008

The current carnage in the global financial markets would have been unnerving lot of investors including you. The Indian broad equity markets (based on SENSEX) is down by around 55% in this Calendar Year. 

The reasons for the Indian meltdown would be summed as follows:

• The fall in Indian equity markets is more due to the exit of foreign investors (FII’s) than any major fundamental issues. Due to problems in their domestic economies (example USA) these institutions are exiting in large numbers which is putting a lot of pressure on stock prices.
• The sentiment towards investing and stock buying is extremely low. People who read and follow lot of business channels/newspapers are constantly fed with negative news and rumours which is quite disturbing.
• Existing investors are in a state of panic and many are exiting without any rationale.
• Some sectors which had formed some sort of bubble like real estate are correcting massively. As real estate happens to be a big contributor in the equity markets, its effects are being felt now.
• Money has become scarce and banks have become tough in lending.
   

However the silver lining is:

The stock valuations which was broadly around 20 (as measured by P/E ratio) in Jan 2008 which means investors where ready to put Rs 20 for 1 Re of profit. This ratio now stands between 8 to 10 . This means Rs 10 put in stocks can give Re 1 of profits which is similar to bank interest.

• Corporate profits for majority of fundamentally sound companies are projected to grow at more than 15% p.a. even in these times. This means the P/E ratios would come down making Indian stocks still more attractive going forward.
• Indian banks are well regulated and not as leveraged as the now infamous foreign banks.
• Indian is still supposed to grow at 7 to 8% p.a.
• We have a strong domestic economy unlike other countries.
• Interest rates and Inflation would be coming down in the next few months as indicated by RBI.
• Crude oil prices have crashed of late.
   

Historical perspective:

• It is very difficult to predict market bottom. However market bottom now appears closer to market top.
• When there is all round pessimism and bad news, it generally signals the approach of a market bottom.
• The upwards movement of the equity market is quick and fast in the following 6 to 12 months after the market bottom.
• Equity portfolios have generally given more than 100% return, 3 years from the market crash of 50% and more.  

We would advice our readers as follows:

• Don’t panic and exit. Think rationally.
• Investors not having fresh money to invest need to restructure existing equity portfolio towards fundamentally sound large cap stocks or equity funds. Give time to your portfolio and don’t exit if money is not required now. Things would be definitely better in future. Bad times don’t last.
• If you have registered for monthly saving plans with mutual funds (SIP’s) then don’t stop them. Stopping it would be a disaster, as you would now be acquiring units at low prices. Increase SIP’s if possible for 6 months atleast. However review the schemes.
  Investors having cash surplus for more than 3 years be brave and greedy now. Invest atleast 25% of your cash surplus in large cap diversified equity funds/fundamentally sound bluechip stocks with a 3 to 5 year time frame. Exit when your target returns are achieved. Historically maximum returns are made for investments done during the maximum pessimism.
• Investors, who are sitting on losses and have some cash flows for the next 3 to 5 years, can follow step 4 above. This would reduce their overall losses. They also need to restructure their existing portfolio.
• Investors who had invested with a particular financial goal in mind (like retirement, children education, wealth accumulation etc) need to continue with their investment plans with proper restructuring. Don’t abandon your long term plans.
• Investors looking at saving tax can invest now in tax saving mutual funds. Excellent time to enter tax saving equity funds with a 3 year perspective.
• Don’t invest with less than 3 year investment horizon.
• Consult a professional financial planner (not necessarily and agent/broker) to give you a proper perspective.
   

I would wish all the readers and their family members a very happy and prosperous Deepavali. I believe you would be buying fundamentally sound bluechip stocks and equity funds during this Diwali Discount sale of Indian Share Markets.

“Be greedy when others are fearful” so said the legendary investor Warren Buffet. Are you listening??

This article is contributed by Naveen Rego (Certified Financial Planner) and owns SimplyFinance, financial consulting and education firm. He can be reached at naveen@simplyfinance.in