The Hindu Business Line : ‘Need not be snowed under by short-term movements of index’

Truth has always been stranger than fiction. For investors, never was this more apparent than last week. Recall the market’s wild behaviour in the past few days and the manner in which people have tried to explain it, especially in ways that may have by now left you quite confused.

Fund houses, like plenty of other professional investors, no doubt had their own explanations to offer. And these may well have added to the general perplexity.

We tried to slice through a lot of wordy jugglery and hone in on a few key points. In the process we came across a set of well-argued proclamations, courtesy our friend Mr Devendra Nevgi of Quantum MF. Here’s what he tells us with reference to what is being described as an “asset bubble”.

The equity market, he notes, has broken all records in the last few days to cross the 19K mark. Other asset classes – crude oil, the US stock market, the rupee in India and several commodities – are also at record or multiple year highs. Real estate, stocks, commodities… almost everything is on a “synchronised rising trend”. Added to these are salaries, which too are hitting the roof.

Low interest rate

So, how exactly are our investors poised in such a situation? (To be more specific, how are equity MF investors looking at these trends?) The reasons behind the developments stem from what have been happening in the US, it is pointed out. The Federal Reserve, it is pointed out, had cut interest rates in mid September.

Here’s an added rationale for your benefit: “Generally, lower interest rates are regarded as positive for the stock markets, since it lowers the cost of funds and enhances corporate investments and profitability. So when US house prices fall, go and buy Indian stocks”.

It will pay to remember that lower rates and cheaper money will also spur international investors to borrow and allocate aggressively with a view to generate better returns. With the cost of money coming down, investors may well leverage, assume more risks and park their funds in somewhat riskier assets. For some players, the Indian stock market can figure in this set of “risker assets”.

Asset bubble

As the Quantum Mutual Fund chief puts it, the key question will boil down to something like this: Will the current spate of liquidity (read: cheap money from overseas) undermine fundamentals and help fashion an asset bubble?

In a classic situation, an asset bubble is self-fulfilling. “Buying sends the prices up which causes other people to buy more. In a typical asset bubble scenario, experts often try to find a rationale for the overpriced markets (say, structural changes or new economy) so as to not be against the crowd and everyone invests with the intent of finding a ‘greater fool’”, it is argued.

This brings us to counsel that is being doled out to investors, especially those of the retail variety. The latter, fundmen believe, need not be snowed under by short-term movements of the index. Further, investors may well locate substantial value in stocks that are not part of any major index.

They also need to ask themselves whether fundamentals factors have indeed changed in this country. And, if the answer is No, a clear No, they need not panic. Instead, the emphasis should be on the long-term, keeping in mind the broad issues faced by the economy.

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