Stock markets have been volatile making investors wonder what to do now

Stock markets have been volatile making investors wonder what to do now?

"For investors, it's an opportunity to buy shares at 15-20 per cent less than what they were available for some time back"

  • October 9, 2015  
  • |  

Nilesh Shah, MD, Kotak Mutual Fund

"For investors, it's an opportunity to buy shares"

These are difficult times. Over the last several weeks, we have seen enormous volatility. What is going on? Is there a reason for investors to be worried?

The concern is for traders and not investors. Traders who took three-six months, one year or intra-day calls have lost money. For investors, it's an opportunity to buy shares at 15-20 per cent less than what they were available for some time back. Trader should definitely worry about how to survive and make money in this volatility. Investors should not worry.

The correction was partly driven by global factors. Last year, a lot of money came from foreign institutional investors, or FIIs, primarily exchange-traded funds or ETFs. These were the funds which retail investors buy and they took a bet on emerging markets.

Now, these investors are seeing headlines all over the world - Brazil is in recession, Russia's market cap is less than that of Apple, China is slowing, there are corruption scandals in Malaysia, and in Indonesia a reformist president is unable to deliver . So, headlines about emerging markets have turned distinctly negative, and that's creating a doubt in the minds of retail investors. A lot of emerging market ETFs are seeing redemptions.

The second factor is sovereign funds, which primarily depend on natural resources such as oil. So, as oil prices correct, funds of oil producing nations are having to liquidate investments to support their domestic economies. So, their exit from India is again due to concerns about their own economies and has nothing to do with India. However, in the long run, FIIs will differentiate India vis-a-vis other emerging markets, and that's when we will see a gradual recovery.

We have been hearing for the last one year that the worst is over and corporate earnings will get better . This doesn't seem to be happening. When will we see a decisive upswing in our markets?

We have definitely underestimated earnings recovery. Actual earnings have been much less than anticipated but there is always hope for a better day. We certainly believe that over the next six quarters, from here till March 2017, there will be a confluence of factors which will improve corporate earnings.

The first driver will be interest rate reduction. A 1 per cent reduction in borrowing costs will translate into 7 per cent earnings growth. Though the policy rates have come down, the cost for borrowers hasn't come down correspondingly. We believe the rates will be cut further and banks will transfer the benefit to consumers. Hence, there will be an earnings recovery due to reduction in interest rates.

The second push will come from government spending. The private sector is on the back foot. We expect the government to spend money and revive investments. In 2014/15, it saved about $50 billion from lower oil prices but used it to clear the fiscal deficit. So, we brought our fiscal deficit under control. In 2015/16, that money will be spent on infrastructure. Between April and July, we saw Rs 90,000 crore higher spending on a year-on-year on basis. This will translate into higher demand and better corporate earnings over a period of time.

The third factor which will help India is rupee depreciation. In 2014/15, the rupee appreciated against yen, euro and pound, and that impacted our exports. For the last six months, our export growth has been negative. In 2015/16, we believe that the rupee will find its own level. It is still stronger vis-a-vis many currencies but definitely weaker compared to 2014/15. This will give breathing space to exporters.

The fourth factor is pay revision for government employees. It is going to be implemented in the second half of 2016. It will put money in the hands of a large number of government employees, exceeding probably more than three million. This will support urban consumption.

SUNDEEP SIKKA, CEO, Reliance Capital Asset Management Fund


Are investors continuing to invest? What's the data pointing out to you at the industry level?

We have seen many times that investors get a little jittery when there is volatility like this. But in the long term, since 2000, there have been 35 occasions when the market has fallen more than 5 per cent in a day and 15 when it has fallen more than 10 per cent in a month. In spite of that, we have seen the Sensex moving from 5,000 to 26,000.

We have seen that investors are maturing. The industry data also show that new investors are coming in, new systematic investment plans, or SIPs, are being started, and that too from small cities and towns. So, these are very positive signs. Those who did not get worried about volatility in the last 15 years have actually ended up making good returns.

So, our advice to investors would be that, volatility, at times, is your friend. You may get scared but volatile markets offer the fund manager an opportunity to keep investing in good stocks.

How does an SIP work and how convenient is it?

The best time to invest has been during a carnage I think SIPs are the easiest way to create wealth. We are all used to recurring deposits, or RDs, in which a small amount moves out of your bank account into a fixed deposit every month. A SIP, too, a certain amount moves out of your bank account into pre-decided mutual fund schemes, and what happens is that you're trying to create a corpus for the long run.

To give you a number, if someone had put in  Rs10,000 a month for the last 15 years, his  Rs18 lakh investment, in spite of all the volatility, would have became  Rs55 lakh. So, he's got a return in excess of 20 per cent, and the beauty is that the money he invested every month was not a huge sum. SIP ensures discipline and takes away the human bias because we believe that the right time to invest is when markets are going up and the right time to withdraw is when markets are falling. But it's the opposite.

Long-term wealth can be created only when this bias is taken away and there is a certain discipline. Now, how do you start an SIP? It's a very simple process. Reach out to a mutual fund company, go to its website, or visit a financial advisor. All it requires is a PAN card, a KYC document and a bank account. And that's the easiest and the smartest way to start making money. '

Anup Bagchi, MD & CEO, ICICI Securities

"Volatility, at times, is your friend"

Are global factors behind the volatility we've seen of late? What is your outlook?

I think markets are certainly volatile as everyone can see, but it is neither the first nor the last time. The epicentre of this seems to be China this time and not US like 2008, or US in 1997 onwards or the 2007 dotcom burst. There are different reasons; markets do tend to get volatile from time to time and it is natural for investors get a sense of fear and dread. My experience is that make these (market) fluctuations your friend. You can't be immune it, but you can manage your life goals through your financial goals.

How do you make the markets your friend?

Firstly, like many good things in life, you need time, patience and hard work. These are the three ingredients of success generally and it is not different for the markets. Let me share some information: during the 2008 market crash, there was a lot more panic than what exists today. But had people invested then, they would have made a lot more money.

People may say that it's really easy to say that in hindsight, that markets are going to collapse and I won't know where to go. The important thing is to chew only the amount you can bear. What is the source of fear? It is loss of control and to some extent, money, but if you have put a lot of your net worth and wealth and you see the markets being uncertain, obviously the whole thing is heightened. There is a sense of helplessness; there is a sense of your accumulated net worth going down and therefore a loss of control.

The only way to manage it is to take it in bites and invest as much as it doesn't impact your lifestyle. The way I look at it, say if you're spending  Rs100 in a month and thinking of spending  Rs110,  Rs10 goes in investment. The  Rs100 is never coming back and you need think that neither is the  Rs110. The good thing about the  Rs10 is it can become  Rs100, but the  Rs100 will certainly become  Rs0. That's a good way of making it a friend. If this  Rs10, that you're investing, becomes a  Rs1,000 you're investing, then it's a cause for worry. You can't let go of  Rs1,000.

Make sure you invest in an amount you are okay to let go and that does not jeopardise your life goals like marriage, education, buying a house. Till the time you're doing that, market fluctuations will be your friend. I keeping saying this that as history suggests, the best time to invest, although fearful, has been during a carnage.

A Balasubramanian, Chief Executive Officer, Birla Sun Life AMC

"We should not get too worried about earnings"

How are you reading the current market volatility? Will it get worse or are we done with the crisis induced by global factors?

We believe that the volatility we have seen in the recent past is temporary. We also believe that India will come out as a big winner among emerging markets. The two markets that will do very well is the US, among developed markets, and India, among emerging markets, given the fundamentals of our economy. Therefore, my answer is that volatility is going to stay but the rate of volatility and the downward trend could get restricted.

One thing which is intrinsic to GDP is corporate earnings. Can we expect that to go up anytime soon or will we have to wait for another couple of quarters?

Are we looking for growth to come back in a hurry? I think the answer is no. Given the fact that most Indian companies are not looking to increase their capex, a large part of spending is expected to come from the government. We hope that public spending will push up growth. It will probably be followed by private sector spending down the line. As far as earnings are concerned, though there are a few indicators which suggest an uptick, we will have to wait another two or three quarters to see if the trend can sustain. For example, rise in sales of commercial vehicle and increase in coal and power output are some of the early signs that things are looking up. I would say that improvement in corporate earnings will start from the first quarter of next year. At the same time, we will also get sufficient support from the RBI, which may cut rates by, may be, 75 bps in the next nine months. This may lead to an improvement in earnings of Indian companies. Our advice is to look at long-term investing so that every fall is an opportunity for increasing exposure to equities.

We have seen quite a few stock-broking outfits, some international, lowering the target as far as the Sensex is concerned. Does that worry you?

The Sensex comprises consumer durables, pharmaceutical, banking, metal and automobile companies. It is bound to go down because of a few sectors, especially in the metal space, whose earnings have gone for a toss. Till such time we see a recovery to the earlier levels, there won't be an improvement in earnings. If you want to look at market movements in the next five to seven years, as long as the economy grows at 7-7.5 per cent, we have good fiscal balance and we get a reasonably good investment from the government to redeem the economy, we should not get too worried about earnings.


"Wealth is built by buying good firms and holding on to them"

What is the mood of investors? Are you seeing them continuing to put money in SIPs or are you seeing the fear getting the better of them?

I think it's a pretty mature reaction as three weeks back, when the Nifty first fell 5.9-6 per cent, on one single day equity mutual funds got a net inflow of  Rs1,000-1500 crore, although there is no official data yet. During this period, my guess is that anywhere between  Rs2,000 and  Rs3,000 crore net inflows, specifically in the last 10 days, would have come in. So, I don't see any signs of fear. Yes, there are some signs of questioning, as to where all of this is leading us, but the initial reaction was that if you're willing to buy something at 30,000, then you should definitely be willing to buy that at 25,000. So, the reaction has been pretty mature.

Can you explain the three or four different kinds of schemes or categories first-time investor should look at?

Since we're talking about people who want to participate in equity markets and are at an initial stage, I think ultimately we're investing in equities to create wealth and in our experience wealth is created by buying good quality companies and holding on to them. So I would say that people should not complicate their portfolios or life too much. Broadly speaking, there are plenty of types of funds, even within equity - you have diversified funds and focused funds, large-cap and mid-cap funds, opportunistic funds etc. I would say that to keep things simple, in order to create wealth over a sustainable period of time, you need one good large-cap fund and one good mid-cap fund.

All in all, there are more than 7,000 listed companies. If you apply all kinds of financial parameters, there are 150-200 good companies that one would like to invest in. And there are some 500 equity funds which are looking to buy 200-300 good companies, and it can get complicated. So, my request is, keep it simple, buy a couple of good funds, keep adding to them and hold on to them for a long period. The other thing about not buying too many funds is each fund may be holding 50-60 stocks, So, if you buy five different schemes, you eventually end up with 300 scrips.

What about people wanting to invest in debt funds?

As far as fixed income is concerned, again, you just need a couple of funds. I would say one Triple-A rated or high-quality bond fund, called income funds in our industry. An income fund which has a good mix of Triple-A rated bonds and government securities, that's one kind of fund you need. The other kind is a liquid fund/short-term fund that helps you keep money ready, either for an emergency or whenever you want to take the benefit of a market fall.