Should you run away from the stock markets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you run away from the stock markets? 

A  A  A
In this issue:
» Weak rupee to help exports
» PSU banks need an overhauling of hiring policy
» Euro zone seeing better times?
» Chinese economy is stabilising
» and more....

00:00  Chart of the day
If you take a look at the chart below, you will see that the Indian stock markets have really not delivered anything over the past 3 years. The BSE-Sensex has given a mere 5% returns since the beginning of January 2010 till date.

Source: BSE

And if you look at the volatility that we have seen in recent times, you must be asking these questions - "Should I just sell my stocks and run away from the stock markets?" Or, "Should I simply invest in fixed deposits and bonds?"

Our founder, Ajit Dayal, has addressed these important questions, among many others, in our recently held web summit. He says that an investor needs to have stocks in his portfolio. The debt instruments like fixed deposits have given better returns as compared to the stock markets if one looks at the past 3 years. However, these returns have been insufficient to compensate for the increased cost of living or inflation. Unlike stocks, debt does not have the capacity to ever compensate for the increased cost of living. For this you need equities or stocks and hold them for a long period of time. And the stocks you need to buy are of those companies that have good managements, strong fundamentals and that have built this strength without taking on too much debt.

For those scoffing at the idea of holding stocks given that the markets have not really gone anywhere over the past 3 years, there is something that they need to remember. Not all asset classes deliver the same returns year after year every year. This is why Mr Dayal has emphasized on the need for asset allocation. Investors need to hold a bunch of asset classes that include equities, debt, gold, etc. So that if one asset class performs badly, then the returns from the other asset classes can help safeguard your wealth.

For the apathy towards the stock markets, Mr Dayal has blamed the regulatory system in the country. The thing is that Indians have an innate tendency to save. As a result the quantum of savings in India is huge. But a very miniscule percentage of these holdings find their way into the stock markets. The reason - people are simply scared of investing money in the stocks. Why? This is all thanks to the multitude of scams and issues that have hurt stock markets in the past. The spate of failed IPOs has not helped either.

Unfortunately the regulators, including SEBI, have done little to allay investor fears. If they can come up with a stronger regulatory system that actually works, then domestic investors would start investing in the markets.

And when that happens, India would no longer need to rely on FII flows for providing the boost to stocks. Neither would we have to start panicking when people like Bernanke announce that they would be shutting down their printing presses.

Do you agree with Ajit Dayal's views on the Indian share markets? Please share your comments or post them on our Facebook page / Google+ page

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It seems it takes the Reserve Bank of India (RBI) to every time stick its neck out and pin point flaws in India's financial well being. Whether it is governor Subbarao warning that the Food Security Bill will drain the economy's precious resources. Or whether it is deputy governor K C Chakrabarty citing the reasons for failure of PSU banks. That Mr Chakrabarty himself is an ex-PSU bank chief makes his views on the matter even more credible.

As per Business Standard, in a recent bankers' meeting, Mr Chakrabarty contradicted the bankers' views on the reasons for poor performance of PSU banks. The officers have pitied themselves for managing affairs in a poor economic environment. Many even blamed the pile up of bad loans on government policies and lack of reforms. But as per Mr Chakrabarty, it is poor administration of the banks that has caused the mess. The fact that PSU banks chiefs are selected in an ad hoc manner, are in office for barely 2-3 years, and lose a lot of time cleaning up the predecessor's mess add to the problem. The result being that most of them have very little time to prove themselves. Thus Mr Chakrabarty's suggestions with regard to overhauling the selection and assessment of PSU bank chiefs are very pertinent, we believe. The faster they are implemented the sooner they will bring a welcome change in investors' outlook towards PSU banks.

The weak rupee is proving to be a boon for exports. It is believed that depreciating currency may well see export growth surpass double digits this month. However, it is not just currency that is responsible for export growth. The economic conditions in the West have also played a major role. It may be noted that in the second quarter of this fiscal, Euro Zone and US economies have grown by 0.3% and 1.7% respectively. Better growth figures in the West are likely to give a fillip to Indian exports.

The Indian Commerce Ministry is targeting exports of US$ 325 in FY14. Taking into consideration the current rupee trend and signs of revival in West, this may not appear challenging. However, it may be noted that rupee depreciation alone cannot boost exports. It must not be forgotten that along with rupee, major emerging market currencies have depreciated as well. Thus, the currency advantage should not be viewed in isolation as other emerging market countries also have the same benefit. If India really needs to boost its exports and trim current account deficit it must turn cost competitive. This will help it to better place its products in the markets and there by boost exports.

The stupendous growth that China recorded in almost a decade made it a force to reckon with in the global arena. So much so that a lot of hopes were pinned on Chinese growth making up for the recession in the developed world. But that has not necessarily happened. Indeed, the Chinese growth engine has sputtered and the country has been a victim to slowdown just like many of its peers in the developing world. But the tide could once again be changing.

It appears that China's economy is showing signs of stabilization backed by policy support and some improvement in global demand. Government debt is said to be under control and factory output seems to be recovering. More importantly, the government seems to be keen on implementing some key reforms. The objective is to structurally change China's business model which was earlier dependent on debt fuelled construction and exports. These changes would mean that China may not be able to record the kind of growth that it did pre-crisis. Moreover, only time will tell whether these measures will do their bit in improving the fortunes of the dragon nation. But it does seem like a step in the right direction.

First there was news that the US economy is on a recovery path. Then came another surprise from across the Atlantic where the Euro zone recession may also be finally coming to an end. And now it appears that the Chinese economy too appears to be stabilising after a pronounced slowdown in the first half of 2013. So, is the world suddenly out of the mess it found itself in during the sub-prime crisis? The news flow we just highlighted does point towards that direction. However, the most important question is whether the growth has come about on its own? Certainly not. Enormous amounts of money have been printed across the world to bring the economies back on track. And as soon as this process starts winding down, we would be back to square one we believe.

Thus, the hope of the policymakers that the recovery would be able to stand on its own once some kind of support is given to it is proving to be totally wrong. May be they should try a new approach now. They should totally stop their intervention and instead let market forces do their work. This would ensure that leveraged, uncompetitive firms don't survive and will in turn lay the ground work for a fresh round of sustainable growth. Is anyone listening?

In the meanwhile after opening the day on a positive note the Indian equity markets continue to trade above the bottom line albeit at lower levels. At the time of writing, the Sensex was up by about 26 points (0.1%). The other major Asian stock markets closed the day on a mixed note with China and Korea leading the gains while markets in Indonesia and Singapore closed in the red.

04:55  Today's investing mantra
"Time is the enemy of the poor business and the friend of the great business."- Warren Buffett
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10 Responses to "Should you run away from the stock markets?"

Prakash Basrur

Aug 28, 2013

Economics is a "zero sum game" is waht they say but in recent years almost all the participants seem to have lost in the game! Then who has gained in cornering all the benefits ? The politicians , the hawala traders , the Wall Street and other bankers , the day-trading stock brokers ? Who ? Will Ajit Dayal tell us who are the beneficiaries ?,,


hoshang dehnugara

Aug 28, 2013

i agree with Mr Ajit .I am game for investing



Aug 27, 2013

Mr. Ajit Dayal,s lecture was very good. I realy enjoyed it. He covered all the topics in detail except only one thing; which is how to engage our oil drilling companies and to reduce the dependancy on oil import. At this stage of financial crisis, this can defnitly helpful and our curency shall not fall to this extent.


Kaushi Shah

Aug 27, 2013

I do agree with Mr. Dayal.


Rajendran Thuruthiyil

Aug 27, 2013

As Mr. Ajit said, our enemies are not Pakistan or China. Our enemies are our politicians who do not work for the prospects of the people, but for their own benefits.

Like (1)

Muthuswamy Rajasekar

Aug 27, 2013

It seems very difficult to see good days ahead for stock market and growth of our nation. We need our political system to be connected with objective based results to rule the next session of 5 years. If the promises made in election mandate not fulfilled political party should not be allowed to contest in the next election. Country has suffered a lot to march ahead in growth path because of scams and bribes prevail in our ruling systems. Need to see Our country grow in a much faster pace than the other Asian countries. People of India should wake-up to question when there is wrong thing happens in our system. This cannot be done by single person. We need our country's people to voice over wherever we see injustice happens.

Jai Hind.

Like (1)

Sathyamurthy Iyengar

Aug 26, 2013

I would agree with Mr.Dayal. However i would also like to say that we as INDIANS do not have much risk taking abilities. We always think of long term wealth creation by means of investing in land and other immovable properties. We are also great investor in GOLD. If we teach our generation to think otherwise, then we have won it and can see people move out of dead investments. There should be courses like Financial Engineering, which would help them to understand more on markets. Further we also should see that people should be thought about Risk Management, so that they know how to scientifically how risks are analysed and then invested.

Like (1)

krishna murthy

Aug 26, 2013

I keenly hear the speach of Mr.Ajit Dayal. What ever he said is truth. We are all great ful to him and his suggestions. In India of late I am finding the people who does not cheat, whether they are literally educated like doctorate, MBA, economic experts, political experts etc, or not. They do not have respect to the chair they are sitting ( including PM,FM,HM, few retired SC judges, all) or the post they are holding. Given this madness of majority of people around us, how to deal with them is the major worries. Business and public sector people think they are born to cheat and loot the country. They go to an extent that the govt files are missing, an conspiracy against the state. Given this situation we all feel pen may not sufficient and gun may be the future tools to be handled. Kindly advise how to make life for respectful living.

Like (1)

vinod bajaj

Aug 26, 2013

Stock markets have turned dicey because of the FII investing and "moving" the markets! It is no more about fundamentals. Its now only good for day trading.

Like (1)


Aug 26, 2013

If returns in last 3 years is bad...but what about next 3 years?
ref :First there was news that the US economy is on a recovery path. Then came another surprise from across the Atlantic where the Euro zone recession may also be finally coming to an end. And now it appears that the Chinese economy too appears to be stabilising after a pronounced slowdown in the first half of 2013. So, is the world suddenly out of the mess it found itself in during the sub-prime crisis? The news flow we just highlighted does point towards that direction. However, the most important question is whether the growth has come about on its own? Certainly not. Enormous amounts of money have been printed across the world to bring the economies back on track. And as soon as this process starts winding down, we would be back to square one we believe. our view..

Like (1)
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