Retail investors missed the action for most of the year 2014. The stock market ran up with retail investors sitting on the fence, in disbelief. Then when some were convinced of the potential intensity that the market holds, they were eager to invest, but were looking for a correction to make the first move. After denying them a correction for long, the market finally obliged with a big down-move for two consecutive weeks. The question to ask yourself is ‘Did I significantly add stocks to my portfolio in the last two weeks?’ If the answer is ‘No’, then you are among the majority of retail investors who swear to take the plunge on corrections, but develop cold feet, when the market actually does fall. The fear of a falling market grips us and we continue to wait and watch. Not surprisingly, the market staged a smart comeback, and retail investors may still be well below the ideal asset allocation needed for equities at this point in time.
I spoke to a few people to understand why they aren’t investing in the fall. One person said because the government hasn’t done enough so far! Another cited a global turmoil. Let me address these two concerns.
First, the selling was accentuated by cross-asset volatility and dollar swings. The Russian ruble's plunge sparked the sell-off across equity markets. Even the Rupee came close to breach the 64 per dollar mark. Now that the market is up again, don’t think the concerns around the world have vanished. But I would urge investors to focus on domestic factors rather than what happens abroad. This way you will be effectively able to filter the noise. As long as India’s economy is improving, it will shine out in an otherwise gloomy world. In the recent past, investors have feared El Nino, SepTaper and Geo-political events, but these are now out of our memory. And the Indian market has moved higher in absolute terms.
Second, the government, in my opinion has done a lot so far and we must give it more time before we jump to any premature conclusions. The Union Budget is anticipated to be the next big trigger on this front. When focusing inwards, we must keep an eye on the positive macro-economic changes. Downward trend in crude oil is the biggest positive. Our current account deficit is well under control. The fiscal deficit is among the lowest we have seen for the past three decades. Corporate earnings will rise at 16%+ for the next 3-4 years and we will see a interest rate cut early 2015.
Global liquidity is benign, so notwithstanding near term reactions, India would attract fund flows in the medium to long term. This is not the first or last correction we will see. But, to my mind, the overall trend is up and we will see many new highs for this market in the years to come. Keep the faith.