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 hamper confidence of investors and especially ‘retail investors’. Since 14th Sep 2018 to till date, different indices have fallen by approx 11%. The severity of fall has shaken the confidence of investors.

Market corrections are always seen with some problems into micro or macroeconomy. We have to understand the push of correction and future outlook after correction is over. Having said, market corrections are 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 the 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 major 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 the last 1 year. According to analyst it is still overvalued in real terms and may touch INR 76-77 in the 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 the 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 effect is coming from US bond yields which is going up aggressively. The current US bond yields are 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 a negative impact on emerging financial markets like India. After an Increase in any kind of duties on products from the international market, it is going to be tough to sell in the 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 the US imposing heavy duties on Chinese and Indian goods is, hampering the prospect of free trade policies worldwide. We being service providers and the manufacturing hub is 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 the Indian Economy will see a comfortable level of inflation in FY 19. As per RBI, they are still maintaining a 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 the Indian system. However, RBI has not changed any rates in his monetary policy but we feel in the 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 the future, the market may see a weakening in credit take off because of high-interest rates.

6)   FII’s Outflow: Till last year December, FII’s were majorly buying in emerging markets but since the weakening of currencies in emerging markets they became net sellers. Any emerging financial market is heavily dependent on FII money because it does not only help in international currency basket but it also helps domestic investors to analyze 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 makings by the current Government in the 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 the best of Infrastructure for FDI. No doubt, these all steps have not given the best results in the short term but we believe that it will yield greater results in the coming future. A subsidy from the 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 for the last 4 years but we feel the government will go in the populist mode because of elections in the next year. Decision making will take a pause because of state election by end of the year and central election by the first half of the 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 rumors, 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 rumors. It may fetch positive results in the short-run but as the life of rumors is short so is your positive result. Being an investor, you have to understand the profit booking opportunity and buying opportunity available in the financial market. You can’t invest money for a shorter period because risk and reward ratio in the stock market becomes attractive in the long 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 the long term. Markets are bound to take corrections for healthy and positive outcome in the future. If you are a mutual fund investor than your horizon of investment has to be 5 years 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 the line with 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 the future but for reaping out the benefits of positive results you have to stay invested. Past experiences of the 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 a more downward movement in the financial market. We also believe that FY 19 may be suppressed 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 the 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 the 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 help you in understanding the right mix of your asset allocation. In Bull Run, any stock can generate higher returns but the strength of the company or share can be judged in rough weather of the 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 assets. It will help you in freeing risky asset classes and will help you in finding opportunities for buying, easily available strong fundamentals backed assets in the current market.

5)  Emotional Investment Decisions: In the current market situation, investors are bound to behave emotionally which leads to wrong decision making related to investments. If your asset allocation is fine then do not unnecessarily change portfolio dynamics. If your horizon is long term then don’t redeem, switch, book profit in your portfolio rather go for value buying on lower levels of the market. If you have generated decent returns from one of the instruments, then 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 into 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 the instrument just because of a 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 the current year and we are sure that these types of panic situations may come in the near term, but the winner will shine with flying colours in the future. Poor performance of financial markets may harm sentiments in shorter run but equity always shines with best of the results in the longer run. We feel the pain of the 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 the Indian economy, Indian consumption story, Indian household income, Indian rural growth is picking up, we may see the Indian financial market-beating all emerging markets very soon and with flying colors.

Disclaimer: Author is Rohit Khandelwal. He is an 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 rates of return are tentative, not guaranteed in nature to anyone.
Mutual funds are subject to market risk, kindly read the scheme related documents before investing.
Insurance is the subject matter of solicitation.
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