Understanding the present unclear market

There was a time when everyone would appreciate equity stocks. The investors, fund managers, analysts and even the commentators felt that equity must be an integral part of a portfolio building strategy, for all segments of investors. There was a sort of an equity cult going on and they felt it was here to stay.

However, things have changed in recent months. These days, most of the people have hardly heard anything positive about the stock market. The markets and the investors are facing rough days with the rising inflation, oil prices and the fear of an economic slow down. Investors have started questioning the ability of equity to build wealth over time. The main reason to this is because they have seen the down turn of the market which wiped out returns in the last six to nine months. So, now the investor’s perceptions about equities have changed.

Commodity price driving inflation is the biggest weakness in India. If this is curbed then equities would run sharply. It is understood that markets will always climb a wall of worries. A clear blue sky is dangerous. At present the market – sky look unclear and so it is time for buying opportunities rather than worrying about the sky falling on our heads.

The recent 14% spike that took place in oil prices, in two days, indicates speculative activity and cannot be just for the high demand. The market is continuing to focus on tight supplies, but there could be a trigger which will Lead to corrections with any unwinding of large speculative activity. This might still take few weeks more to happen. There is a possibility of an intermediate spike happening before the fall. But the oil based risk-reward is slowly moving against the bulls.

A recent US data indicates a 40% year after year drop in fuel consumption. Consumption will further curb due to high energy prices and slower growth. The same thing is likely to happen in Europe. Although governments in emerging economics have taken care of the citizens by shielding them from the rising cost of oil through subsidies, yet the recent price rise has forced them to raise prices. The growth will be dampening by such a happening.

You must understand the fact that just as the stock market does not always go up, so also the market will not always go down. If investors decide to sell in panic, during a declining market, they then could end up turning paper losses into real ones. In other words, by selling in a panic situation towards a falling market, there will be paper losses into real losses happening.

It is the first instinct of any normal investor, to flee the stock market and move money to safer, options like debt products. This happens because short term investors don’t have a clear time horizon to be in the market. On the other hand, a serious long term investor’s are mentally prepared to handle down turns and they have time on their side. If you move your money from equity funds in response to a short-term loss, you could then miss out on gains when the market rebounds. Just think for your self.

I would like to conclude this article by saying that in order to manage risk, buy in phases. You can buy at every sharp dip in the markets and oil prices or rise in the dollar. Commodity stocks should be avoided. Focus on domestic consumption themes like entertainment where I have constanly suggested to invest in stock like Dish TV, telecom players like Bharti, retail engineering , pharmaceuticals.

Tagged as: Commodities, Crude, Entertainment, Pharma, Telecom

1. Understanding the true sense of the present market situation
2. Understanding the good side of the market
3. Poll, Inflation, Oil and the equity market