The Hindu Business Line : Learning to live with a volatile market

The last few weeks have been rather eventful for the markets, what with rising interest rates, a not-so-friendly Budget and looming inflation casting their shadow on valuations. As if these were not enough, global factors such as an appreciating yen (with the consequent impact on global fund flows) and worries over the US economy contributed their mite to the cause gut-wrenching volatility in domestic trading and a sharp fall in the indices.

Investors are having nightmares about the possibility of a replay of May 2006 when the market went into a tailspin, eroding their wealth and their confidence too. They are rather confused because even with all the volatility and free fall in the indices, everybody in the market still sounds bullish on the long-term prospects.

What do fund managers, brokers and market analysts think about the current phase? Where, in their opinion, are the markets headed in the near and medium term? What do they feel are the factors investors need to watch out in the near term? And, finally, what is their advice for investors?

We posed the above questions to some top fund managers and market analysts and this is what they said: The current volatility is something investors need to learn to live with and it is likely to persist over the near term as a number of factors play themselves out. Investors should stay calm during this phase, pick out good stocks when they fall and lock into them for the long term. Here are the detailed responses:

Volatile times

Mr R. RAJAGOPAL, DBS CHOLA

Retail investors may be put off by volatile trading of the kind we saw when the Sensex yo-yoed by as much as 400 points in intra-day trading on a couple of occasions in the last month. But fund managers say that volatility is something you have to learn to live with. "Volatility is, in a manner of speaking, a constant. In some situations it is more evident, in others it is not so conspicuous. Investors need to accept this as a fact of life," says Mr R. Rajagopal, Chief Investment Officer, DBS Chola Mutual Fund.

The permission granted this week by SEBI to institutions to short-sell will add depth to the market and reduce volatility, according to Mr Gul Tekchandani, formerly of Sun F&C Colonial and now a market strategist. "At the current index level, a 200-500-point move represents a mere 1.5-3 per cent fluctuation and such volatility should not be seen as unnatural," he says, putting the issue in perspective.

MR SANDIP SABHARWAL, JM MUTUAL FUND

Very well, but how does one handle it when one's own money is at stake? "Seasoned investors need not be too bothered with volatility. Instead, there is actually a case for using this as an opportunity. Each volatile session creates troughs and crests. Get into good stocks when volatility depresses prices. Get out if you see them rise when the broad market is moving up," says Mr Sandip Sabharwal, Chief Investment Officer (Equity), JM Mutual Fund.

But how long is this phase going to last? "Market volatility is now going to be an ongoing process... and will continue in the medium term also," says Mr Avinash Gorakshakar, Head- PCG Research, Emkay Share & Stock Brokers. Agreeing with him is Mr Shailendra Jindal, Chief Executive Officer, Mehta Financial Services Ltd., Mumbai: "The volatility that we are seeing would continue in the near term with increasing exposure of the markets to foreign capital, especially hedge funds."

Mr Prateek Agrawal, Head, Equities, ABN Amro Mutual Fund

But Mr Prateek Agrawal, Head, Equities, ABN Amro Mutual Fund, has a different view. "The degree of volatility should reduce from abnormally high levels. The market has digested events like the Budget and an appreciation in the yen. It is now stabilising and no large event is around the corner. Hence, volatility levels should fall," he says.

Liquidity is the factor that will decide the market direction in the near term, say fund managers, unanimously.

Market (un)makers

MR SIVA SUBRAMANIAN, FRANKLIN TEMPLETON

"First and foremost is the global liquidity situation, one of the prime reasons for the rise in equity markets around the world. One needs to closely monitor the possible impact of interest rates in the developed economies on the flows into emerging markets," says Mr K. N. Siva Subramanian, Senior Portfolio Manager-Equity, Franklin Templeton Mutual Fund.

"Liquidity flows will be important. A definitive move towards other emerging markets at the cost of India by foreign institutions will be a crucial factor," says DBS Chola's Mr Rajagopal.

MR C. J. GEORGE, GEOJIT SECURITIES

Inflation and interest rate trends, not just in India but also other economies, such as the US, are other important factors to watch out for. "Level of inflation and interest rate movements in the US and other markets as well as in India would be key elements that will determine the course of the markets," points out Mr C. J. George, Chairman, Geojit Securities Ltd., which recently sold a part of its equity to BNP Paribas.

Agrees Mr K. R. Bharat, Managing Director, Advent Group: "The first factor is interest rates. The second is slowdown in the global economy. This will impact global liquidity and, in turn, have a negative impact on the amounts invested in emerging markets." Higher energy prices, a possible slowdown in reform and in corporate earnings growth are listed by many of the respondents as factors to watch out for in the near term.

Corporate earnings

Can Corporate India sustain its earnings growth at the high levels seen over the last few quarters? Opinion on this is divided but almost all the respondents say that the one factor to watch out for will be interest rates and their impact on corporate performance. "We believe that the earnings momentum should be maintained. Higher interest rates could hurt companies which cannot source foreign capital," says Mr Agrawal of ABN Amro MF. JM's Mr Sabharwal agrees with this assessment: "The third quarter was in line with the past trend, and the coming quarters may not be too dissimilar provided business dynamics do not change extensively. However, investors should keep in mind the interest rate scenario," he says.

The most bullish comment comes from Mr Rajagopal, who feels that the "earnings growth story should be intact and actually grow stronger". "Corporate earnings growth of 16-18 per cent may not be difficult to achieve, provided the momentum continues," he says.

Sounding a note of caution, however, is Mr Bharat of Advent group: "It will be difficult to maintain these growth rates next year. One reason is the base effect. Secondly, a lot of companies, having reached full capacity, are in investment mode. This means that the growth from these investments will take time to fructify." The base effect is something that Mr George also alludes to, pointing out that it may be difficult to sustain the margin expansion of the past.

Some, like Mr Siva Subramanian of Franklin Templeton, feel there could be some volatility due to earnings expectations not being met. "Over the last five years, earnings growth on an average has been around 30 per cent which will not be sustainable, going ahead," he says.

The dreaded `V' word comes back into the calculus while discussing the near-term prospects for the market. The unanimous opinion of those we surveyed is that the near term could be volatile and choppy with several imponderables affecting the market direction. "I expect the market to remain range-bound and under pressure in the short term. In the medium term it will outperform global equity markets," declares Mr Bharat.

Agreeing with him is Mr George, who says that one should be prepared for volatility in the near term though most of the issues that disturb the market in the short term will be resolved in the medium to long term. Sounding a more bullish note is Mr Gorakhshakar, who says: "In the medium to long term the India story will be intact and the market, despite being volatile, will offer 15-20 per cent return in the medium term".

Mr Siva Subramanian feels that the markets could be impacted in the near term by the tightening liquidity as the RBI looks to stem inflation. "However, given the strong economic fundamentals, we believe that the medium- to long-term outlook remains positive," he says. His advice to investors, therefore, is to take a long-term view while investing in the equity market. "We believe long-term investors are better off adopting a bottom-up approach and investing in companies with good fundamentals across market-cap ranges and sectors," he says.

(With inputs from Nilanjan Dey, Namrata Gada, Jayanta Mallick and C. J. Punnathara)

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