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Investing during volatile markets

Surprises happen, often Taking a step back, we had no clue about the PM’s announcement about the de-monetization (banning of Rs 500 &...

Thursday, November 17, 2016

Investing during volatile markets

Surprises happen, often
Taking a step back, we had no clue about the PM’s announcement about the de-monetization (banning of Rs 500 & Rs 1000 currency notes) and are still to come to terms with the impact and the after effects of the move. Neither had anyone any idea that a certain Donald Trump, a political first-timer, will be elected the President of the US of America! 

But both events happened, and took most, if not all of us, by surprise.

Coming back to Indian markets, the commentators are as divided on the economic and political impact of the anti-black money drive on the common man as they were clueless about such an event unfolding. However, prima facie, I see the following likely outcomes:

  1. Rise in deposits, will bring down rates: If the so far, surge in bank deposits (Rs 4 lakh crores so far; ~4% of total deposits) are anything to go by, the move may shore up bank deposits which in turn would swell short term liquidity in the system, putting downward pressure on interest rates causing the lending rates to start falling.
  2. Correction in prices of traditional black money havens: Maybe you would also have guessed that real estate prices would correct and at least home buying (for self use) may be a good idea in the near term. 
  3. Near term pressure on lending agencies: Equity investments in banks and NBFCs (especially LAP & MFI) may be under pressure for the near term as disbursals, collections as well as borrowers finances take time to adjust.

But all that you probably already knew. So what new can I tell you? 

I will reiterate on sticking to the basics of investing. Hence:
  1. an investor’s long term investment strategy should be influenced by near term/macro events to a limited extent. I believe that usually it’s a mistake to base investment decisions on macro forecasts/events. 
  2. macro events are important market influencers and hence often provide attractive entry/exit levels, which should be made use of. But they should not influence the choice of investment 
  3. investors should continue to invest with a long term view, taking an objective view on individual company’s performance, financial health, quality of business (existence of sustainable advantage & pricing freedom) loosely tempered with appropriate valuation measures 
  4. A long term investors should avoid making too many entry / exits and frequent churn in the portfolio. Sadly, churning is a trait, often encouraged by brokers by providing tips, automated or chat based reccos, rock bottom brokerages etc.

Call to action:

Significant correction has taken place in the markets, and may continue in the next couple of months.


Value investors should ideally take advantage of near term fear / greed of the market.