Use corrections to enhance equity portfolio
The S&P 500 index corrected 4.84% in the two trading sessions just gone, on the back of an announcement downgrading US’ sovereign debt. The Indian equity market followed suit with the S&P Nifty index correcting 4% in the last two trading sessions.
These are extraordinary times: the global economy is reeling under pressure owing to slower-than-expected recovery in US’ economic growth and possible sovereign debt defaults in at least one European nation. Major indices across the developed and emerging economies corrected between 6% and 14% in just the first week of August. Owing to selling pressure in line with global events coupled with the shock of the recent 50 basis points (bps) hike in domestic policy rates, Indian equity markets have corrected at least 9.9% over 10 trading sessions since 25 July.
One basis point is one-hundredth of a percentage point.
But in all this, what will happen to your investments in the equity market? Should you use the opportunity and start investing or should you pull out and contain further loss that you may incur? Are we headed for another 2008-like phase?
The answer is a long-term investor need not worry about short-term volatility. In fact, now is the time to top up your systematic investment plans (SIPs) and deploy the lump sums lying in your savings account. Also, continue to believe in the India story and here is why.
There is little reason to lose hope in India’s growth, especially with the Reserve Bank of India (RBI) coming up with an assurance. In a statement issued on Monday on its website, RBI said: “Friday’s market behaviour demonstrated India is not insulated from global developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8%, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact.”
The slowing global growth will have an impact on India’s gross domestic product (GDP) growth. Says Leif Lybecker Eskesen, chief economist for India and Asean, HSBC Global Research, Singapore, HSBC Bank Plc., “India’s economic growth for this fiscal is likely to slow down to 7.6% on account of high interest rates, near full capacity utilization and high inflation impacting investment.”
According to Prateek Agarwal, chief investment officer, ASK Investment Managers Pvt. Ltd, “While India growth outlook is clearly worsening, relatively India continues to maintain its position (if not improve) among global investment destinations.”
Consumption-led demand: Demographics in India are such that the working age population is expected to grow. According to a Harvard working paper by David E. Bloom, Population Dynamics in India and Implications for Economic Growth, the ratio of working age population to non-working age population will peak only around 2040. A Wall Street Journal report says half the population of India was younger than 25 in 2010. That will only change to half the population being under 28 in 2030. With a fast growing young population, consumption-led demand is unlikely to slow down and GDP may remain stable.
According to a research note from Agarwal, the current environment is conducive for domestic consumption plays.
Low dependence on exports: What also works in our case is low dependence on exports; exports account for roughly 20% of the GDP. Says Krishna Sanghvi, head (equities), Kotak Asset Management Co. Ltd, “Exports are not a very meaningful number in the context to the overall GDP. We are more of a consumption-oriented economy.”
Lower inflation expectation: Slowing global growth may lead to lower commodity prices, thereby lowering inflation expectations. Says Sanghvi, “The rise in oil and commodity prices globally was exporting inflation to India. The current global uncertainty may lead to fall in these prices, proving positive for us in the context of monetary tightening. ”
K.R. Kamath, chairman and managing director, Punjab National Bank, agrees. “If the global commodity prices, particularly crude, corrects, it would help control inflation and even the fiscal deficit situation would improve. Both of these augur well for our economy,” he says.
If you are concerned about a repeat of recent history, those fears are uncalled for. Says Sanghvi, “During the Lehman crises, global lending had dried up leading to a domino effect. This time there are no such fears, hence it is different.” It also helps to remember, the 21.3% crash in domestic equity markets after the Lehman announcement lasted nine months and the market recovered at least 33% over the next nine months.
It is surely not the time to get scared and sell your positions, or even freeze up and not take any action on your portfolio.
Equity markets have corrected almost 10% in two weeks and this is a rare opportunity that you should use to top up your SIPs. Says Atul Singh, managing director and head (global wealth and investment management, India), DSP Merrill Lynch Ltd, “Valuations in India equity markets have become attractive and there is earnings growth potential, it makes sense to maintain exposure.”
If you are sitting on the sidelines waiting to start your equity investments, don’t be deterred by the volatility, use this sharp decline to begin your SIP.
In the event of such volatility it also makes sense to spread your investments. You can start by investing 30-50% of your surplus now and then stagger the rest over the next four-six weeks. Says Vishal Kapoor, head, wealth management, Standard Chartered Bank, India, “It’s difficult to catch the bottom and it makes sense to spread out your investment.
Systematic transfer plans are a good way to do this. Be mindful of the absolute market level too and ensure you are not too slow to deploy.”
Ensure you maintain your asset allocation in equity. If equity allocation has fallen on account of this year’s correction, use this opportunity to bring it up to the original levels.
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