Decision Making in Current Financial Market Scenario

Decision Making in Current Financial Market Scenario

Market is going through rough patches so is your mutual fund Portfolio. Bleeding markets usually hampers confidence of investors and specially ‘retail investors’. Since 14th Sep 2018 to till date, different indices have fallen by approx 11%. The severity of fall has shaken confidence of investors.

Market corrections are always seen with some problem into micro or macro economy. We have to understand the push of correction and future outlook, after correction is over. Having said, market corrections is a way of profit booking by all type of investors and majorly domestic or foreign financial institution. Market generates higher returns comparing to other asset class in long term because of its uncertain nature. Markets not only get affected by domestic issues, but also it gets affected by international economies issues as well. Being an investor, we have to understand and analyze both the parameters for long term inflation adjusted better returns.

Issues Related To Current Market

Currently our markets are not only getting affected because of domestic issues but most of emerging markets are going through rough weather because of US economy related decisions taken by the US government. Market turmoil is majorly because of two reasons, one is dollar strengthening and another is crude shock. We as an emerging economy is also getting affected by that, but how long it is going to continue is a bigger question in major of investor’s mind. Let’s first understand the major issues Indian Markets are facing:

1)    Dollar Vs Rupee: The rupee has fallen more than 13% since last 1 year. According to analyst it is still over valued in real terms and may touch INR 76-77 in near term. Oil imports and rising crude oil prices, are leading to an increased demand for the dollar which in turn making rupee weaker.

2)   Crude Oil: Oil Prices has been increased by more than 53% since last 1 Year and major of the economist and analyst are predicting that it may touch the levels of 95 to 100 USD. Being a net importer of oil from international market, India is going to suffer highly on current account deficit because of high crude prices.

3)    Bond Yields: Not only Indian bond yields are increasing but the major affect is coming from US bond yields which is going up aggressively. The current US bond yields is at 3.23 which is an increase by more than 36% in a year which is attracting investors to the US treasuries and in turn making currencies of emerging markets like India weaker.

4)   Trade War: Concerns of escalating trade wars are resulting in negative impact on emerging financial markets like India. After Increase in any kind of duties on products from international market, it is going to be tough to sell in US market. Since major of the markets adopted for free or less costly trades in international markets, this is the first time that the fear of US imposing heavy duties on Chinese and Indian goods is, hampering the prospect of free trade policies worldwide. We being service providers and manufacturing hub are also going to be affected by this. 

5)    Liquidity Concerns: Yesterday i.e. 5th Oct 2018, RBI has released its monetary policy. RBI was very optimistic about the concerns related to inflation and they were confident that Indian Economy will see a comfortable level of inflation in FY 19. As per RBI, they are still maintaining GDP growth rate at 7.40 for FY 19. Having said that RBI is very much comfortable with these 2 parameters but the concerning area is liquidity available in Indian system. However, RBI has not changed any rates in his monetary policy but we feel in coming future they will be bound to increase interest rates because of US bond yields going upwards. As of now, there is enough liquidity available for credit take off but we are sure that in future, market may see weakening in credit take off because of high interest rate.

6)   FII’s Outflow: Till last year December, FII’s were majorly buying in emerging markets but since weakening of currencies in emerging markets they became net sellers. Any emerging financial market is heavily dependent on FII money because it’s not only help in international currency basket but it also helps domestic investors to analyse the strength of their market. High US bond yields, strength in US stock markets forcing FII’s to pull out money from emerging markets to US markets.

7)  Government Decision Making: We have seen many of the strong decision making by current Government in last 4 years, be it curbing on black money, GST implementation or deregulating fuel prices. As an emerging economy, these steps were very much needed to compete with other emerging markets and developed markets. Government were very clear to make India a global hub of manufacturing along with providing best of Infrastructure for FDI. No doubt, these all steps have not given best of results in short term but we believe that it will yield greater results in coming future. A subsidy from government not only creates a burden on government but also squeezes any chance of better tax mobilization with lower rates. Having said that, steps taken by the government were very encouraging since last 4 years but we feel government will go in populist mode because of elections in next one year. Decision making will take a pause because of states election by end of the year and central election by first half of year.

8)   News and Sentiments:  Being an investor, we always look for news and reports available in the market. Few reports, which we receive, are accurate but major of false news called as rumours, spreads aggressively in bear markets. Which news to be picked or which news to be thrown out has to be decided by investors. You cannot make investment decisions based on rumours. It may fetch positive results in short run but as the life of rumours is short so is your positive result. Being an investor, you have to understand the profit booking opportunity and buying opportunity available in financial market. You can’t invest money for shorter period because risk and reward ratio in stock market becomes attractive in longer run only.

What to Do

1)    Don’t Panic: Being an investor, your investment horizon has to be long term. Markets are uncertain and that is the only reason they generate better returns in long term. Markets are bound to take corrections for healthy and positive outcome in future. If you are a mutual fund investor than your horizon of investment has to be 5 year plus for getting better results and we are very much sure that if you have invested 5 years before also than your results are very much in line of the expectation.

2)  Cyclic Nature of Markets: High Crude prices , uncertainty in international markets ,dollar strengthening, FII’s outflow, negative news flow, trade war,  all these are cyclic in nature. If today, you are finding too much of negativity in markets then be sure that it will take a U turn and become positive soon. You have to have patience for this type of negative news flow. As we say, things which came down today will definitely go up in future but for reaping out benefits of positive results you have to stay invested. Past experiences of financial market prove our point very well. For an e.g., on 14th Dec 2007 sensex was at a level of 20030.83, and it crashed to a level of 8891.61 on 27th Feb 2009 but in next year, it was at the level of 21004 on 5th Nov 2010. This was a correction of 55% and recovery of 136% in 1.5 years.

3)    Look for Buying Opportunity: Markets after current correction, looks fairly valued on these levels. Having said that, we still believe that there may be more downward movement in financial market. We also believe that FY 19 may be suppress year for equity investment wherein you may not get desired results from your investments. But we also believe that this period can be taken as an investment opportunity on lower levels. No one can predict the bottom of market so as we, but we feel if you want to invest INR 100 in the market then for sure you can start off buying with 10% -15% on every fall in the market. We are also sure that whatever the base markets are going to make in FY19 that will be the benchmark levels for the market on lower side.

4)    Asset Allocation: Trust us, this market correction has given ample opportunity for investors to re look his asset allocation in market related products. You have to have decent diversification with  handsome asset allocation in your portfolio. When market is in Bull Run, no one bothers to give attention towards asset allocation but these types of tough situations helps you in understanding the right mix of your asset allocation. In Bull Run, any stock can generate higher returns but the strength of company or share can be judged in rough weather of financial market. So sit and review your portfolio for all weather asset allocation. If needed, don’t hesitate in booking losses in less attractive and high risk asset. It will help you in freeing risky asset class and will help you in finding opportunity for buying, easily available strong fundamentals backed assets in current market.

5)  Emotional Investment Decisions: In current market situation, investors are bound to behave emotionally which leads to wrong decision making related to investments. If your asset allocation is fine than do not unnecessarily change portfolio dynamics. If your horizon is long term than don’t redeem, switch, book profit in your portfolio rather go for value buying on lower levels of market. If you have generated decent returns from one of the instruments, than do not hesitate in booking profit in that instrument because you have seen more high’s on that product. Always remember, till the time money doesn’t come in your account it is virtual profit only, so is with losses. Losses are virtual losses till the time you don’t book them and once you book them they became real losses.  Don’t cut instrument just because of fall in the market. You have to stick with your goal planning and investment based on that.

Markets are going to be too volatile in current year and we are sure that these types of panic situations may come in near term, but the winner will shine with flying colours in future. Poor performance of financial markets may harm sentiments in shorter run but equity always shines with best of the results in longer run. We feel the pain of financial market should not dilute your investment capabilities, rather an investor should pick these fall as an opportunities to enter in the market and build long term portfolio with decent diversification and dynamic asset allocation. We are very much confident that the way Indian economy, Indian consumption story, Indian household income, Indian rural growth is picking up, we may see Indian financial market beating all emerging markets very soon and with flying colours.

Disclaimer: Author is Rohit Khandelwal. He is AMFI registered mutual fund advisor.  All views expressed in the article are his own. or Infomagine consultant LLP doesn’t guarantee any accuracy of date. All shown rate of return are tentative, not guaranteed in nature to anyone.
Mutual funds are subject to market risk, kindly read the scheme related documents before investment.
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