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Suresh Krishnamurthy

Uncertainties are a part of investing today. Staying invested through such uncertainties is the only option to make money in the current market situation. Exiting the equity market now does not appear prudent.

JUST a couple of months back, Rakesh Jhunjhunwala, the big bull of the stock market, said that to make money investors would need to stay invested through periods of uncertainties. Hardly would investors have imagined that one such period was just round the corner.

Now that it is upon us, the advice is: Don't panic. Stay invested. Nothing of relevance to the stock market has changed dramatically in the past few days. In a majority of cases, earnings and risk estimates are unlikely to change. Selling across the board may not be prudent. Do not get out of equity market now.

Swift adjustments

Besides, unlike earlier days when the market would take days to adjust to changing conditions, the alignment happens swiftly these days. Earlier, a stock would lose only 8 per cent. However, just on Friday many stocks lost 20 per cent in addition to the losses earlier in the week. So, the likely changes may have already been factored into prices.

It is incumbent on investors to keep an eagle's eye on the unfolding events. It is possible that the near-term earnings growth in a couple of sectors will decline if some of the threatening noises made by the men who matter come to pass. But there is no need for investors to get out though their portfolios may need a revamp.

Frightening noises

The first noises that have emanated from the winning political combine are worrying. Here, it is not what the Left has said that is worrying, but the utterances of Dr Manmohan Singh and Mr Jairam Ramesh. Their words can make investors break out a cold sweat.

In his interaction with the press, Dr Manmohan Singh said that a decision on oil price hike will be considered after taking into account the profitability of the oil companies. Similarly, Mr Jairam Ramesh said that he prefers a balance between the policies of Dr C. Rangarajan and Dr Bimal Jalan meaning that he favours a rise in interest rates.

There may be merit in these arguments. They desirable from the perspective of welfare economics.

But by the market perspective, these may send strong negative signals for stocks in the oil and banking sector. Not surprisingly, the market seems to have already wisened up to the thinking of these policy-makers. Oil and banking sector stocks were the worst hit in the carnage on Friday.

Balanced response

Even in these two sectors, selling may be ill advised now. It is possible that the stated intentions will not be matched by actions. It is also possible that both Dr Manmohan Singh and Mr Jairam Ramesh will not have fully revealed their thinking and, in total, their intentions may be in favour of companies in these two sectors.

In addition, the news is not particularly threatening for other sectors in the economy. Specifically, private sector companies do not appear to have any cause for concern. It is also likely that the new dispensation at the Centre will go all out to improve the economy's growth rate. For, it would be keen to show that the economy grew at a faster pace when it is in power compared to what happened in the earlier regime.

Focus on relevant factors

Given that policies favouring economic growth will be either continued or given emphasis, investors would do well to focus on relevant factors.

These are the rising crude prices and liquidity. Rising crude prices can cut short a recovery in global economic growth.

This will have implications for growth in India. Similarly, if interest rates rise globally, the kind of liquidity seen sloshing around now may disappear. More than changing policies, a decline in liquidity can spark a bear rally in the markets.

In such a scenario, the importance of stock selection cannot be over-emphasised. Even if the market dips, there would be a set of stocks that would either rise in value or do substantially better than the rest. Investors need to be skilled enough to identify such stocks.

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