Market corrections of 10%-15% are common. But investors’ memory is short
“Stay the course. This is not the time to panic. The conditions that create a major market crash are not evident at this time,” said Debashis Basu, trustee of Moneylife Foundation. He was addressing Moneylife Foundation members at a session on “Markets in Turmoil: What Should You Do Now” in Mumbai. The markets have been struggling for over nine months now, having come off about 15% from the peak reached in March 2015. Many sectors, such as realty, infrastructure and metals, are down 30% or more in the past six months. The decline is due to multiple global factors, combined with poor earnings growth and high market valuation.
Mr Basu pointed out that after Narendra Modi became the prime minister in May 2014, the markets rose mainly on expectations of better prospects for businesses. The Sensex shot up from 22,000 in April-end 2014 to over 30,000 in March 2015. Those who had invested at the beginning of 2015 will be staring at a significant decline in their portfolio value. This has, naturally, given rise to anxiety among investors, especially since global markets are also in turmoil. The Chinese economy is expected to slow down significantly and markets in the United States (US) have corrected sharply fearing interest rate increase by the US Federal Reserve. However, the Fed has not changed interest rates, for now.
Mr Basu provided a perspective to the correction. He explained that every time there is a sharp sell-off in the market, investors tend to worry because the human mind is gripped by losses and declines and fear of further losses which dominate the headlines. “We forget that such declines are fairly common in stock markets. However, most of these occasions are forgotten when the market rallies.” Mr Basu brought these instances back to memory and showed how a 10%-15% correction is not necessarily the start of a bear market.
“Severe bear markets have certain characteristics, such as extremely high valuations, a flurry of fund-raising activity, sharp increase of penny stocks, new themes and overwhelming retail participation. These characteristics are missing in the current decline,” he added. This does not mean that one can buy stocks fearlessly and the market will head higher. “We have been arguing that the market has been overvalued since late-September early-October 2014; one has to be highly careful about choosing the right stocks.” Mr Basu suggested that this is not so difficult, if one tunes out the noise and sticks simply to buying stocks that make high return on capital and are fairly valued.