Stock markets in crisis: Stay or Exit? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Stock markets in crisis: Stay or Exit? 

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In this issue:
» Jim Roger's latest autobiography...
» Who is to be blamed for the Financial Technologies debacle?
» Indian rupee again close to all-time low...
» FIIs are exiting Indian markets
» ...and more!

00:00  Chart of the day
After touching a recent high on July 23, 2013, the BSE-Sensex has fallen 1,138 points (-5.6%) as of August 02, 2013. That's just 8 trading sessions! With this, India has lost the US$ 1 trillion market capitalisation status. On July 23, the cumulative market cap of all listed Indian companies stood at US$ 1.06 trillion. As of August 02, this has dropped down to US$ 952 bn. The chart of the day shows the worst BSE-Sensex performers (in percentage terms) over the last 8 trading sessions.

Data Source: Ace Equity
*Stock price change from July 23 to August 03, 2013.

Surprisingly, the Indian bourses had been falling during a week when several global markets were witnessing gains. An indication that our problems are very much domestic! The falling rupee has raised India's chances of a downgrade by ratings agency S&P.

But things are actually much worse than even this! A closer look at the broader markets indicates that the bloodbath is worse than what the benchmark indices reflect.

Here are some very gloomy statistics as reported by Business Standard. One out of every five BSE-500 stocks has hit its respective four-year low! About 126 stocks from BSE A and B group have hit their lowest level since July 2009. Even worse, about 33 of these stocks touched lifetime lows on the exchange.

Many of the stocks that have been beaten down severely have a lot of debt burden on their books. Some fell sharply owing to corporate governance issues.

One thing is clear. We're in a crisis, irrespective of whether policymakers may want to believe it or not. Market sentiments are getting more and more pessimistic.

With so much negative uncertainty, should investors be buying stocks? The answer is yes, but with conditions. Yes because there is no better time to go shopping great stocks when sentiments are down and traders are dumping stocks. Of course, the stock prices are not going to reverse overnight. You have to be very patient and careful while picking stocks. You have to really know what you're buying into. Notwithstanding short term volatility, the real risk in stocks is to not know what you're putting your money into.

The current market turmoil just vindicates our strong belief in the principles of value investing. Slowdowns and crises are part and parcel of all economic activity. While many businesses will falter during such times, the really good ones will emerge even stronger. Our focus as value investors must be to keep an eye on such robust businesses and grab hold of them when they come down to attractive levels. So all in all, do not fall prey to the pessimism of Mr Market. Take advantage of it instead. Investors who managed to grab hold of great businesses during the stock market crash of 2009 saw their wealth going up multi-fold.

And most importantly, make your asset allocations very carefully. Keep aside sufficient amounts of cash that could be handy in times of any financial emergency. Have a fair amount invested in other asset classes such as fixed income and gold. And when you invest in stocks, make sure you have a well-diversified portfolio of stocks. This will ensure that even if a few stocks underperform, your overall portfolio will not be significantly impacted.

Do you think it is a good time to pick stocks when market sentiments are low? Please share your comments or post them on our Facebook page / Google+ page

----------------------------- How to get regular payouts from the stock market... (Video) -----------------------------

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We have prepared a short video explaining this proven investing approach. And what's even more exciting is that this approach works equally well during uncertain times like we are seeing now.

However, this video will be available for a short time only. So you should see it immediately to avoid missing out.

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Relentless research. Extreme passion. Fiercely independently thought process and a streak for hard work that few can match. Just as this qualities would sit lightly on the shoulders of Warren Buffett, so they would on another maverick investor. And he is none other than Jim Rogers. So if one wants to know how to become an investor and a trader par excellence, why reinvent the wheel. Jim Rogers' latest autobiography Street Smarts: Adventures On The Road And In The Markets will tell you just that.

A leading daily reckons it to be a fascinating read. Rogers is a great investor alright but under that facade he is a human being just like us. And hence susceptible to the fluctuations in passion and reason. Of course, this is to take nothing away from his investing success. If there could be one lesson that investors would take away, it would be to listen to no one and conduct one's own research in as much detail as possible.

The recent ruckus in the Indian markets has created fear amongst the market participants. The story goes like this. National Spot Exchange Ltd (NSEL) had to suspend some contracts under the direction of Forward Markets Commission (FMC). It is alleged that NSEL extended settlement dates of the contracts and also permitted selling of goods that traders didn't have in their warehouses. It may be noted that NSEL is a platform where traders trade commodities. However, delivery is compulsory in this case. Thus, any trader who has sold any contract needs to have the goods located in his warehouse. This is to ensure that delivery is done at the requisite date. Failure to do so can result in default.

Inability by NSEL to oversee that its members had the goods required for delivery resulted in cancellation of many contracts for the fear of default. While there is an ambiguity over this entire issue relating to cancellation of contracts, it is clear that regulatory policies were inept. Both government and FMC are indulging in blame game citing that none of them is the regulator of NSEL.

The real losers in this entire episode have been investors. The stock of Financial Technologies, the parent firm of NSEL, dropped 76.2% in the last 8 trading sessions. It's high time that risk management and regulatory policies are given due importance in India. Else investors will continue to be a scapegoat in this entire blame game.

The last time the rupee touched record lows, RBI's measures nearly choked short term liquidity. Not just the banks and bond markets, but even mutual funds felt the tremor. As the rupee once again headed dangerously close to 61 per dollar levels yesterday, all eyes were yet again on the central bank. Interest rates in the country have already taken a U-turn. If the RBI continues to tighten liquidity, it could bring credit disbursal to a complete standstill.

But is RBI the demon here? At least that is how India Inc seems to be projecting the problem. All this while, Indian companies were busy borrowing abroad at dirt cheap rates. Also the current account deficit problem hardly worried anybody as long as the dollars kept coming. It was only when rates in the US showed possibility of up-move that the dollar inflow dried up. The government was caught napping when the foreign institutional investors (FIIs) and NRIs decided to plug the inflow of dollars into India. Finding no confidence in the government, the dollars actually took a flight home. And since then, the rupee's slide against the dollar has become a regular crisis. But as is with growth rates, we believe it is not the RBI's sole responsibility to manage the currency. And it is India Inc's responsibility to show the mirror to the Finance Minister.

Foreign institutional investors (FIIs) are major drivers of both equity markets as well as the debt markets in the country. When they are happy, money flows into the markets and prices shoot up. But when they are upset with India, they take their money out and prices crumble. And this is what has been happening for the past few weeks. True that foreign investors have been selling out in most of the emerging markets but the extent of pullout in India is much higher.

The reasons are the same old ones. The economy has slowed. The currency has weakened. Signs of revival are invisible. Our Finance Minister did go on air a few days ago saying that reforms are happening but in reality there is very little linkage between the plans and their outcomes. Policy announcements have been made but there has been very little implementation of the same. In such an environment, investors have turned cautious. Unless policies are implemented fast, it is likely that investor confidence could weaken further. If that happens, it would spell bad news for all of the asset classes.

Majority of the global stock markets closed in the green during the week, barring India and Brazil. The US reported mixed data on unemployment for July. The unemployment rate fell to 7.4% in July which is the lowest since December 2008. However, growth in non-farm payrolls was below expectations. The US GDP growth reported during the week stood at 1.7% for the April-June quarter. As per various sources, the Fed intends to narrow down its bond buying activity, after it gets more clarity on economic growth and unemployment rates going forward.

China too reported its non-manufacturing PMI (Purchasing Managers Index) data. As per the reported data, growth in China's non-manufacturing sector rose to 54.1% during July, from 53.9% in June 2013. However, inflation also increased during the same period. China's economic growth had staggered in the first half, as factory output and investments had slowed down. The Chinese government was expecting growth to accelerate in the second half. In the European markets, robust insurer earnings helped drive European share markets to a two-month high on Friday.

The Indian stock markets closed on a negative note. Various factors impacted the stock market performance. The rupee further depreciated against dollar and touched Rs 61.78 on Friday. This was due to increase in imports, which resulted into higher demand for the dollar. The weakness of the rupee was also fueled by better than expected US GDP growth, which had further strengthened the US dollar.

There was a spate of quarterly results announced by companies. While some companies reporting robust numbers, there were many companies which reported muted earnings growth during the week. This too hurt sentiments. On top of this, the RBI kept the key rates unchanged in its monetary policy and revised the GDP growth estimate lower to 5.5% for FY14.

Data Source: Yahoo Finance

04:50  Weekend investing mantra
"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating."- Peter Lynch
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2 Responses to "Stock markets in crisis: Stay or Exit?"

monish gaur

Aug 4, 2013

loss and gain are two sides of same coin, bear them both with same resilience and do not panic in distress. comments are good, like always pretty late advice when retail investors have lost dosh in almost all sectors across the board

Like (1)

Dileep shelke

Aug 4, 2013

MCX is touch the lowest. What should be done. Hold or Exit

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