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To be or not to be? - Views on News from Equitymaster
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  • May 11, 2004

    To be or not to be?

    The last couple of months have been rather volatile as far as the indices are concerned. The main culprit so to speak has been the election fever that has gripped the country and resultant uncertainty has led to the volatility on the stock markets. Against this backdrop, we asked our audience whether their asset allocation towards equities has been altered in any way i.e. increased, decreased or remained the same.

    Considering the fact that the indices have been volatile over the last 2 to 3 months, one would expect that investors would ideally pare their exposure to the equity markets. The results of this poll however may surprise to an extent. A majority (55%) of the audience has indicated that they have increased their exposure to equities over the last two months. While 27% of the audience has said that they have reduced their exposure, while the rest have not changed their allocation in anyway. While this poll may not be indicative of the sentiments of the majority of the investors, it indicates one important aspect.

    Historically, one has observed that the Indian investor has been risk averse and has turned away from the stock market after a list of scams that hit the stock markets in the last decade. More importantly, retail investors also have the track record of entering late into the stock market. And this has not changed. If one were to look at the trend in 2003 when the indices rocketed upwards, the bulk of the money came from Foreign Institutional Investors (FIIs). Retail participation was not significant.

    Having seen indices move up sharply and correct sharply in the last 5 to 6 months, retail investors seem to taking this as a chance to invest in stocks. The increased allocation in the last two months, as indicated by the poll, justifies this argument. But whether this is a wise move or not remains to be seen. We believe that the section of the populace that have reduced its exposure in the recent past may have done the right thing after all, considering the magnitude of volatility.

    So, what is our view? Considering factors like the election jitters, firm crude prices and fear of hike in interest rates globally could mean that the markets may remain volatile in the short-term. Though one should not read much into it, the recent sell off by FIIs could increase uncertainty. After all, they have been the key investors over the last one and a half years. Though we are trying to sound negative, it is better to exercise caution in these volatile times.

    Over the long-term, these volatilities smoothen out and sound fundamentals based investments bear reasonable returns. One has to understand that irrespective of which party comes in to power, the continuation of economic reforms is inevitable. A new government may delay the process. However, it cannot be delayed indefinitely as India is increasingly getting integrated with the world economy. Investors at this point of time need to look carefully at valuations whenever the markets react negatively and should take investment decisions based on their risk-return appetite.



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