Of "Asian" flus and global cues…
With no "bottom" after the 10% decline over the past fortnight, the Indian markets are at it again – down 3.2% as we write! Indian equities are seemingly having a case of the Asian flu: benchmark indices in Japan, Singapore, Malaysia, China and Taiwan have just closed in the red (see graph below). These markets, in turn, are taking the "global" cue from a 1% decline witnessed in the US markets on Friday.
Fears of an economic slowdown in the US, China's proposed leash on speculative domestic capital and the realisation that the Indian economy is in an 'overheated' mode, have seemingly shaken investors belief whether the Indian stockmarkets, after a 4-year dream run, are actually a pretty 'risky' place!
A slowing economy….
We shall reiterate what we have been saying with respect to the economy overheating and the hanging sword of rising capital costs globally (and in India). We believe that there is a high probability that the Indian economy will slow down as the RBI is (correctly) determined to keep inflation under control by increasing interest rates and slowing demand.
…does not change our view.
Well, we are not surprised by the attempts by the RBI to slow the economy! We continue to believe that the Indian economy will grow at a rate of 7% to 7.5% per annum on a long-term sustainable basis. We continue to believe that earnings of India Inc. will grow at 15% per annum on a long-term sustainable basis. So do not get confused about the noise that will be created over a slower growth rate in the US economy or by the selling of FIIs that may cause the market to decline shaprly (as it did in May June 2006).
Focus on your portfolio, and your ability to take risks
The effect of a slowing economy will vary by sector: capital goods companies will possibly see a slowdown in orders; but technology companies may not be affected. However, the global decline in stock markets may see a further sell-off in Indian share markets. But do not let these near-term swings and "bull" and "bear" markets rattle you. There is a way to be immune to all the noise about the Asian flu and global cues. The smartest and most successful investors in the world tend to ignore such volatility and always invest with a long-term perspective – they are never concerned about the daily movements in stock prices
The events of the past week should have given you ample reason to reassess your portfolio exposure. The specific stocks you own (click to read our view on large-cap and mid-cap stocks) or the mutual funds you own ( meet a Personalfn representative ) must have a risk-return profile that suits your financial goals and your risk-taking ability. Never gamble in stocks and mutual funds, always invest rationally.
Markets: You are not alone!
"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffett
Did your stocks survive last two week's plunge? No? Well, you were not alone to have taken the hit! Data compiled for CNX Nifty stocks show that, during the period from 2nd February 2007 to 2nd March 2007 (28 days), all 50 of them lost ground, with the Nifty itself losing 11% during this period. What more, 23 of these (or 46% of the pack) are down on a yearly basis as well! As for the BSE-Sensex, all 30 stocks ended the 28-day period in the red.
Nifty: Top 10 losers
02-Feb-07 02-Mar-07 Change 52-Week H/L
VSNL 505 360 -28.8% 516 / 300
Grasim 2,811 2,097 -25.4% 2,940 / 1,455
Hindalco 184 138 -25.2% 251 / 133
Jet Airways 786 600 - 23.6% 1,058 / 475
Guj. Ambuja 143 110 -23.1% 153 / 70
OBC 219 174 -20.5% 280 / 139
MTNL 169 135 -20.1% 229 / 123
ACC 1,041 854 -17.9% 1,195 / 601
PNB 517 427 -17.4% 582 / 300
BHEL 2,502 2,098 - 16.1% 2,666 / 1,533
The weakness in Indian equities over the past few sessions has been due to a combination of factors - most of them actually impacting the whole of global equity markets. China was simply the trigger, but the fears of slowdown in the US has an equal part to play if not more. And you know what, despite being the 'trigger' for the global 'collapse', China was the only one among the major global indices to end the stated period (2nd February 2007 to 2nd March 2007) in the positive!
Global equities: India 'leads' the pack!
Index Country 02-Feb-07 02-Mar-07 Change
BSE-Sensex India 14,404 12,886 -10.5%
Bovespa Brazil 44,998 42,370 -5.8%
Hang Seng Hong Kong 20,564 19,442 - 5.5%
CAC France 5,677 5,425 -4.4%
Straits Times Singapore 3,218 3,079 -4.3%
Dow Jones US 12,653 12,114 -4.3%
DAX Germany 6,886 6,603 -4.1%
NASDAQ US-Tech 1,798 1,726 -4.0%
FTSE UK 6,311 6,116 - 3.1%
Nikkei Japan 17,547 17,218 -1.9%
Shanghai Comp. China 2,673 2,832 5.9%
Source: Yahoo Finance
After the significant volatility witnessed in equities over the last two weeks, you must be wondering whether this is a sign of things to come. And why not! Following four strong years of stock market gains and sky rocketing valuations across sectors, it would not be out of doubt to believe that the markets may enter a prolonged period of selling (or correction). Whatever the case may be, recent events are certainly a reminder that there is, in fact, 'risk' in equity investing.
"Risk comes from not knowing what you're doing." - Warren Buffett
So, what are the lessons learned?
The past few weeks must have provided you with a great time to reassess your risk exposure. However, it would be folly to blindly sell off your stocks based solely on the recent events. While the latest market plunge might serve you a wake-up call, it should not be seen as a forecast that 'all' stocks are headed downward. In fact, now is a great time to make sure that you are invested in financially sound companies with strong business models and reasonable valuations.
Where to from here?
As we had mentioned in our view on the market after the Wednesday (February 28, 2007) fall, the recent decline should be taken as an opportunity to invest and build a long-term equity portfolio. Needless to say that the equity component of the overall asset allocation should be in line with one's risk-return profile. Overall, you, as a retail investor, should not shy away from equities given the recent decline in the stock market. Invest in good companies with strong business models ( i.e., ability to ride through cycles) from a three to five year perspective and do not worry about the day-to-day market movements.
Parting note (From Warren Buffett's Letter to Shareholders, 2000)
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."