Mayhem in Indian Markets: Stay calm and this too will pass!

Dear Friends,

                     Tight Integration with Global Economy has its own Pitfalls. Due to Chinese currency devaluation and growth worries, the markets across the globe reacted negatively. Indian markets were no exception and the Sensex fell by over 1600 points to touch 25,741 and Nifty by 490 points to touch 7,809 on Monday, 24^th Aug 2015. Since 2000, the index has dropped by over 15% on 11 occasions and except for 2008 sub-prime crisis, it has bounced back sharply.

Impact on Indian Markets due to global events have become quite normal as we have seen multiple occurrences in the recent past including the Russian Crisis, Yemen Strife and the Greece Crisis. If the US Fed increases the rate, that would result in another volatility across the globe including India. These are ephemeral in nature as it has nothing to do with the fundamentals of Indian Economy, which are quite strong.

Among the economies in the world, India and USA are one among the few countries, which are relatively strong while Europe, Russia, LATAM, China, and Middle East nations are affected by slowdown, due to a variety of reasons. While there are a few concerns like the Land Acquisition Bill and GST not being passed by the Parliament and Corporate Results yet to gain momentum, it’s just a matter of time, a few quarters max, when such issues will be resolved. The news from the business leaders is that they are seeing green shoots in the Indian Economy and things are certainly expected to improve further.

Following are some of the reasons why Indian Economy Fundamentals are strong:

• Indian GDP is expected to grow at 7.5% plus for quite sometime
• Consumer Price Inflation which was about 11.24% in Nov 2013 has come    down to 3.78% in July 2015 and expected to be in 6% range for quite some time. RBI is very keen that the CPI is kept in a comfortable range.
• India is a big importer of Crude and Crude prices falling from a peak of $140 to $50 range is a huge positive. The money saved through this can be used for development purposes.
• Fall in commodity prices which is at a ten year low is advantageous for India and helps cut down costs
• Unlike China which is heavily depended on Exports for its growth, India is a consumption led economy with Domestic consumption as high as 70% plus of GDP
• India’s Current Account Deficit which was 4.7% of GDP in FY 2013 has come down to 1.3% now.
• We have comfortable Foreign Exchange Reserves of $355 Billion USD
• Young and sizeable working population that can contribute to growth of our Economy.

Key Takeaways for Investors

1. All Asset classes are subjected to price fluctuations (volatility). Gold which was selling at more than Rs. 3000/- per gram in 2012 is now in the range of Rs. 2500/-. Real estate prices are flat in most of the places in India since 2012 which when accounted for Inflation is down by 20%. The exceptions are Government Bonds and Bank Fixed Deposits which when accounted for Inflation and taxes offer negative to near zero real returns. Though Equity investments are volatile, the returns from equity are the highest over long term when compared to other asset classes and this is a proven phenomenon across the globe.
2. Investments in Equity should be done with atleast a 5 year time horizon. 100% Equity Mutual Funds are suitable for periods of 5 years and above, higher the better. Though Markets have given phenomenal returns in some years like 2014, those are exceptions rather than the norm and investors should not be carried away by them. Balanced Funds, MIPs and debt funds can be looked at for shorter durations.
3. Over a 5 year time period, corrections like what we saw on the 24^th Aug 2015 does not make a big impact. Corrections are normal and quite healthy at times so that markets don’t run way ahead of the fundamentals (corporate earnings)
4. Corrections do provide good entry points for investors. So, if you have money, this is a good time to buy. There were huge inflows from Domestic Institutional Investors (DIIs) on the 24^th Aug and subsequent days of last week when Foreign Institutional Investors (FIIs) turned net sellers. Due to Yuan devaluation, Rupee depreciated against Dollar breaching Rs. 66/USD mark and for FIIs who invest in dollars, their gains get eroded resulting in sell-off.
5. Rise and fall in Markets will not be in the same proportion as your funds. Mutual Funds generate 3 to 5% alpha over Index in long term and if Sensex falls by 5% it does not mean that your Mutual Fund Investment has fallen by 5%. As mentioned in one my earlier blogs don’t look at your portfolio on a daily basis and lose sleep and peace.
6. Please feel free to reach out to your advisors, if you are still worried. As far as PenguWIN’s clients are concerned, I will be more than happy to address your questions.

 Hold your nerves, stay calm and this too will pass!

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