Apr 21, 2005|
Markets: Do not panic!
The markets are again at their 'irrational best', or so it seems! With the kind of volatility that has been witnessed in the Indian equity markets in the past few trading sessions, retail investors seem to have been left in the lurch after they had conceded to reports that the BSE-Sensex was well on its way to creating new highs (pick up any business daily dated two months back!).
In this round of volatility, among the worst hit have been stocks from the software sector. The 'ruin' in the markets actually started after the technology bellwether, Infosys, spelled a lower than expected guidance for the next fiscal. While the company had indicated that due to some regulatory compliance issues from the clients' side, there might be some adverse effect on its performance in the first quarter of FY06, what markets seem to have read (or over-read) is that the growth story of the Indian software sector is likely to face a roadblock (!) in times to come. See how markets reacted after TCS' results.
And the reason they give is the possible slowdown in the US economy that could lead to a slowdown in tech spending. Again! There have been talks of slowdown of the US economy for a long time now. People have feared a reversal in the US economic growth as they apprehended a faster rise in interest rates. And the US Fed played a major role in 'adding fuel to the fire'. Now, recently, when the Fed meeting minutes indicated that the members of the central bank do not believe that inflation is much big a worry and that the 'measured' pace of interest rate hikes will continue, the global markets (including India) reacted as if times were never so bright! And now, when Infosys has spelled a conservative guidance for FY06, which they do in any case every year, all hell has again broken loose!
While it is a daunting task to pacify an investor whose wealth has been eroded/wiped out in a market fall like the one we are witnessing now, what we have tried to indicate in the past as well is that they (especially retail investors) need to follow a cautious approach while investing in equities at high levels. While equities as an asset class generally outperform in the long term, short-term tactics can, more often than not, land you in trouble. One or two quarters of bad results and conservative guidance should not bother you much if you have done your research well and have faith in the delivery capabilities of the company and its management. Remember, in the long-term, stock prices do follow fundamentals.
Warren Buffet once remarked, "It is only when the tide goes out that you can see who is swimming naked." And this has been proved time and again by companies that have continued and are continuing, to grow despite tough economic situations surrounding them. When industries grow, benefits accrue to both good and bad companies. But as times get tough and as the real test of companies' strengths begins, the grain can easily be differentiated from the chaff. While investors have behaved irrationally (sad, but that is true!) at more times than one, those who have put their faith in the fortunes of quality companies have seen their investments multiply and would continue to do so.
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