ithought market wrap 39, 19 July 2011

Quick edit: The stock markets seem to be racing to the bottom. Nobody knows where the bottom is. The race is fueled by global trends, investor fears, outflow of funds and data flows. These factors create a snowball effect on indices when they spiral downward. We can’t really predict when this snowballing spiral will lose momentum and halt. The reversal of direction is also not likely to be swift or sudden. The markets will probably look ravaged and desolate for a while before order begins to return. Investors tend to wait for order to return before they venture out with their money. Invariably, they don’t lock themselves in at lower valuations. Waiting for the perfect time to invest actually makes your investing most imperfect. Accepting that one can’t capture the perfect moment and venturing to invest in phases will be the least a smart investor could do at the moment.

Impact: When FII’s sell relentlessly, the markets will only drift lower. And, when markets fall relentlessly, investors shun investments and clam up with money in their bank accounts. But, the recent weeks have seen a strange phenomenon at work. Investors are shunning stocks on the one hand and on the other hand buying debt and gold like there is no tomorrow. This strange phenomenon has put bonds of NBFC’s in great demand and gold is giving weekly returns well in excess of the annual returns which we expect of it. Risk aversion is believed to be the cause of this trend. But, investors in India seem to be ignoring one basic principle. Risk is a function of price and even the so – called safest asset class could be the riskiest if the price is not right. Gold prices seem to be defying gravity and fuelling a hysteria which can ultimately leave investors in great pain when sentiment reverses sharply.

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