|»5 Minute Wrap Up by Equitymaster|
On This Day - 14 AUGUST 2012
What makes stock markets move?
In this issue:
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How do share markets function in the short to medium term? It is important to understand that stock prices usually reflect the future expectations of market participants from the real economy. It may so happen that a bull run commences months before earnings actually show an improvement. Similar, markets may start falling even before earnings show any deterioration. Of course, it is impossible to determine the lead and lag time in such cases. Moreover, the market expectations may not always translate into reality. On many occasions markets are prone to false anticipation.
Do you know one crucial factor that plays an instrumental role in all market rallies and collapses? The answer is financial liquidity. When there's a lot of money into the financial system, bubbles can build up. The opposite is also quite true. A liquidity crunch can bring down markets even when economic fundamentals are strong. But in a globalised world, it is difficult to judge liquidity. FII (foreign institutional investors) money can pour in and flee away at the drop of a hat. A remotely unrelated event in some other part of the world could have an impact on the domestic bourses.
With such wild swings in the share markets, what should investors do? In our view, the value investing technique followed by the likes of Benjamin Graham, Warren Buffett, Peter Lynch, etc. is the best approach to long term investing. Buy fundamentally strong stocks at a discount. Forget where markets are headed. Period!
But it is also true that value investing may not help you in timing your investments too well. And you may also miss out several profitable opportunities in the short to medium. To remedy this, many investors prefer to complement their value investing approach with techniques that help understand market trends and time entry and exits.
As per the daily, this was at the request of the government. But why should government conceal crucial information that affects millions of farmers in the country. What could be the reason for concealing such information? Apparently, it seems that a normal rainfall was the government's only hope at a time when slowing economic growth, high inflation, widening deficits and policy paralysis were taking a severe toll. The news of a drought would only add to the gloom in the economy. But by doing this, the government has only made things worse. Had this information been given earlier, timely steps could have been initiated to assist the agriculture sector.
But how long will this trend last? If an analyst at UBS is to be believed, US dollar's status could be safe for another 50 years. Quite simply because as per him, nothing in the world is as liquid and as widely held as the US dollar. Besides, the dollar also benefits from the military protection the US offers to many reserve holding nations. Well, the analyst's theory does have pretty strong legs to it. And dollar may well remain the reserve currency for many more years to come. However, what we are pretty certain about is the fact that the dollar's devaluation is here to stay. Thus, it will not be a bad idea to keep piling on to that yellow metal called gold.
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