Volatility is here to stay – Manage It

It is going to take many years for the global economy to recover from the 2008 crash. With the Lehman collapse, the banks around the world froze and liquidity was very tight. At the time, impact was to the tune of $ 2.7 trillion. The US Government took prompt action to form Troubled Asset Relief Programme to purchase assets and equity from its financial institutions to strengthen the financial sector. Currently the estimated impact from all the PIIGS countries is US$ 600 billion, but the European Stability Fund or the EU is unwilling to commit funds to rescue these countries. 29th September, is going to be a crucial date to see how this problem can be solved.

In recent history, creditors seem to be more willing to cut slack to the defaulters as bailouts are facilitated through the International Monetary Fund. The Emerging Market Debt crisis in the 1980’s/90s lasted for just three years. However, for political reasons, the European leaders are willing to take small steps only when the debt problem teeters on the verge of disaster. Delay in inevitable debt restructuring is what is causing the markets to be volatile. To prepare for the default and to try and re-capitalize their Balance Sheets, European Banks are calling back their loans, and that is why there is currently a huge demand for dollars. Hence the dollar is up, while all currencies, including the rupee weakens. As Hong Kong is the most liquid market after the US, this too is being sold off. Even the safe heavens, gold and silver, are being off loaded, to meet this insatiable demand for dollars.

With Sovereign Debt levels as all time highs and with growth stalled, it is going to take years for the World Economy to recover. Hence over the years, these crises are going to come again and again, and the inevitable volatility in the markets would have to be managed.


Case for Indian Equities:

1. 80% of the World Growth is coming from the Emerging Markets.
2. Although our growth is slowing down, we will still be growing, as per the worst estimate, at 7%+.
3. Valuation of our markets is currently below the long term average. When analysts start considering earnings of FY 2013, then our market’s valuations are at crisis levels.
4. The next quarter results are likely to be painful, but this is already known and factored in.
5. The interest rates should have almost peaked, and lowering interest rates going forward would stimulate growth. Once the RBI signals peaking of interest rates, as the equity markets are forward looking, the markets should rally.
6. Oil prices have already come down, but we are not feeling the impact because of the weakening rupee. However falling oil prices are going to be a huge benefit to us. Further cooling off of commodities, due to global slow down will result in increased profitability of our companies.
7. Monsoons have been good, and are likely to have a bumper rabi crop.
8. Corporate leverage is quite low and cash levels are high. Although companies are currently not building capex, they seem to be willing to buy other businesses, and hence Mergers &Acquisition activity is high.
9. Cement, which is a lead indicator, has not fallen so much in the current melt down. When the capital expenditure and capacity growth re-starts again, the seller of capital goods books profit immediately, where as the buyer depreciates over time, and this leads to excess profits.


Managing the Volatility

1. Stock picking is going to become crucial. On the same day in August, Bharati Airtel reached its 52 week high, Reliance Industries reached its 52 week low. In a rampant bull market all stocks go up, but in these volatile times stock picking is going to become very important

2. Regular booking of profits and re-balancing portfolios would need to be done, to be prepared to face the next crisis. Hence if you were re-balancing every 6 months, you would have to re-balance every three months.

3. Your asset allocation would have to keep on changing depending upon the valuations of the market. As they become cheaper, larger allocation to equity and vice versa. r

Consult a Certified Financial Advisor to assist you through these difficult times.