Sit tight and don’t give in to market forces

The huge sell-off and market volatility of late has shaken many of you. Here is putting things in perspective, and what you should do – or rather not – do.

Reasons for fall
The primary trigger for the current rout is China, the global growth engine and the second largest economy, sputtering. For one, China’s GDP slowed to a 7 per cent growth for the June 2015 quarter, against the double-digit growth that prevailed in 2010. Over capacities built up in manufacturing, real estate and infrastructure were the main contributing factors to the slowdown.

The Chinese factory sector’s sentiment indicator was at its worst reading since March 2009. Consumption within China can get squeezed as well, again affecting global demand for goods. There is visible stress on repayment ability by Chinese borrowers and China’s loan guarantors are finding trouble meeting their guarantee obligations.

Two, this slowing resulted in a decline in prices of commodities such as copper, iron ore, aluminium and so on, thus impacting several countries’ exports and ending the commodity super cycle that was in place since 2009 and the global stimulus measures.

Three, the Yuan devaluation has also resulted is sharp depreciation in emerging market currencies, such as Malaysia, Turkey, and so on. The rupee has also slipped below the Rs 66 mark, inching closer to the 2013 lows. This may make India less competitive in the export market. China is also among the large holders of US treasury bonds and nervousness in the debt market in the US is visible as a result.

India is relatively insulated
The sharp fall in China’s market and slowdown in the economy means that foreign portfolio investors need to make up those losses (overall in the Asian or emerging market region) by booking profits in more sound markets such as India. This results in short-term selling by FPIs, especially in stocks in which they are lying on sizeable profits. This triggers a sell-off in the Indian market.
The market upheaval on Monday was largely a result of a global panic sell-off. Concerns over China and the US Federal Reserve raising interest rates will see to it that the Indian market remains volatile.

But over the longer term, India is relatively insulated from brewing troubles in China and can also benefit from FPI portfolio reallocation in stronger economies.

First, unlike most Asian countries and commodity-dependent countries that export to China, we are not a major exporter to China. In any case, the rupee has already been depreciating against the yuan for some months now and has thus already been competitive compared to China in the export market.
As far as imports go, we may see an increase in dumping of cheaper Chinese goods but the extent is likely to be limited since Chinese manufacturers cannot indiscriminately cut their own prices, and are said to be sitting on huge inventory.

Second, the rupee’s fall is also unlikely to cause any steep increase in our oil bill, as prices are at 6-year lows and are expected to remain as such given the global glut. Our gold bill too, (which are the 2 large imports for India) may not be inflated as demand is low and a flight to gold is not yet on the cards. Our current account deficit and forex reserves are also in good shape now, which was not the situation in the 2013 currency slide.

Third, the low commodity prices have already been helping Indian companies cut their raw material bills and have shored up earnings even as revenues fell. This benefit thus looks set to continue. The more conducive interest rate and liquidity has also helped improve profitability.
Consumption in urban market is showing signs of recovering, inflation is getting under control, and government finances have improved with lower subsidy burdens. While monsoons are deficient, crop sowing for the kharif season has held steady.

What you should do
While we expect the earnings revival to take longer, market falls of this nature, provide buying opportunities. It is in such times that equity as an asset place provides ‘mispriced opportunities’ especially given the completely stagnant to falling trend in gold and real estate.

The current spate of selling and volatility could last a while, and, as it does, provides ripe opportunities for fund managers to buy into stocks at lower valuation. Yes, you are not going to be privy to the stocks that fund managers may be adding to your portfolio (until you see the factsheet after the close of the month).

So what should you do?
– The first step to take is to keep your SIPs afloat and not panic into stopping them. If you have lump sums to invest, you can consider adding more to your same portfolio to further improve on cost averaging on top of what your SIP would also do.

– You can also invest lump sums in three tranches or so over the next few months, to benefit from any slides in the market. We recommend investing in large-cap funds or diversified funds with a large-cap focus to offer deep value.

Do not expect any overnight results. The impact of this fall would lift your portfolio returns when your each a sustained bull rally. Until then, continue SIPs, plough in more if you can, and sit tight!

Happy Investing!