Jul 27, 2001|
Markets do a Titanic
A crash in global stock markets. A slowing global economy. A sub-par performance in the domestic economy. A scam involving the largest mutual fund in the country. More funds and companies being linked to the scam. The draining of liquidity in the markets due to structural reforms. And this is only the tip of the iceberg, which has rammed into investor sentiment. Ofcourse, Titanic is happening.
Owing to these developments, the stock markets have fallen precipitously: 45% from the highs of February 2000 and 26% from the subsequent peak in February 2001. Indeed, the fall has been across all sectors, although, some sectors have performed relatively better. A bear market is what we are witnessing. And to break out of it we require divine intervention.
||High in '01
|BSE Consumer Durables
|BSE Capital Goods
Yes, we are referring to the monsoon. Unconfirmed reports state that the area under sowing has shown an increase by over 10% to 15% in some parts on the back of the good monsoon. Indeed, some have referred to this year’s monsoon as the best in the last five years. The importance of rural India cannot be overstated. With over 60% of the population being dependent on agriculture as a means of livelihood, even a small change in rural incomes has a significant impact on consumption and investment activity in the country. The industrial sector would be a direct beneficiary of any such upturn in demand. This would give a boost to economic growth.
Coming back to the stock markets, it interesting to note that the since 1990, all major stock market rallies have culminated in scams. Be it 1992, 1994, 1997 and most recently 2000. The timely recurrence of such ‘scams’ obviously puts a question mark on the effectiveness of the regulators. The most recent scam involves the Unit Trust of India, which is considered to be ‘above the law’ i.e. Sebi has no control over it. Whether it is the fault of the regulators, or of those who establish these regulators is debatable. However, one thing is common across these scams – the end loser has been the retail investor.
What should retail investors do in an environment where regulators persistently (knowingly or unknowingly) fail to protect their interest? They should settle for lower returns i.e. by investing in companies that have reputed managements and are hence trading at a premium to their peers, by investing in mutual funds that sacrifice near term returns to ensure safety of capital and by diversifying their portfolios by investing in debt instruments and property. There is a fair chance that such companies/funds will generate better than average returns over the long term, without taking unnecessary risk.
How to plan your investments?
In an environment of persistent uncertainty, one thing is for sure. Market manipulations will continue to happen and more often than not the regulators will step in once the damage has been done. Retail investors need to set up their own safeguards while investing. They also need to understand that higher returns are possible only when one is ready to take on higher risk.
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