Market meltdown: This is a market for the brave investor

By Pravin Palande

The markets are on a free fall. The Sensex lost 4% in a single day on the back of a falling rupee and news of tapering of the quantitative easing in the USA. It was for the 21st time in this year that we saw the market fall by more than 1%.

The volatility Index surged 20% showing that the market was now completely gripped into a tight bear hug as investors got writing call options, the highest form of risk taking and betting that the market will go further down from its present level of 18600 mark.

Jaiprakash Associates, Axis bank and Bank of Baroda are the top losers who have lost close to 9% in a day.

[caption id=“attachment_1038763” align=“alignleft” width=“380”]  The volatility Index surged 20% showing that the market was now completely gripped into a tight bear hug as investors got writing call options, the highest form of risk taking and betting that the market will go further down from its present level of 18600 mark.
Reuters[/caption]

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Ideally this should rattle the big investors.

But most fund managers are keeping their cool. They feel that till the macro economy does not show some signs of improvement there is not much they can do. All they want to do now is avoid mistakes of getting stuck with the wrong stocks.

“It happened in 1996 and many of us made a lot of mistake by getting trapped in stocks that we were not able to sell. It happened again in 2003 and 2009 when investors got trapped after a surge. So the present markets are not really different”, says an experienced fund manager who feels that we should not panic because of the current situation. Every time the situation changed and this time it is no different, he says.

Fund managers and institutional investors will tell us not to panic as they have faith in the fundamental strengths of the country and once the economic situation stabilizes the Indian market will be back in action.

But since 2008 the markets have been so volatile that the long-term investor is very hesitant to return to the Indian market. In 1998 the Indian markets traded at a P/E of around 13 times. That was when the Asian Crisis had hit the shores of India and countries like Indonesia and Malaysia went through a contagion effect on account of falling currencies and equity markets. It took them more than two years to come back.

In 2008 the Indian markets were valued at around 18 times their earnings and investors thought that we can’t get lower than this number. The fact is that we have gone below that number. The Indian markets are now trading at a P/E multiple of around 17 times and there are chances that we might touch the low of 15 times, a number that was achieved after the crash of the technological stocks globally and software stocks in India.

Now we all agree that this is a great market to buy. But if we wait more it will be a greater market to buy.

“This is a market which nobody really understands as some of the quality sectors like FMCG have already been overvalued and are trading at a level of around 40 times. So the so called defensive sectors are out of reach for the investors. These stocks don’t deserve that kind of a valuation”, says another fund manager with a leading mutual fund.

So what should an investor do at this point in time?

The answer is not easy. A lot of people are already saying that there are around 5,000 companies listed in the Indian markets and the markets should not be valued on the basis of the top 50 companies.

But these companies form more than 60% of the market capitaliSation. If we can’t have faith in our top corporates in times of crisis, there is no point in reaching out to the bottom companies which might be trading at lower prices but will not have any long term value in terms of investment.

This is a market for brave investors or those who have deep pockets. Investors are better advised to stay with liquid funds or an index fund if he wants to be in equities or ETFs. The risk averse investor is better off with investing in FDs. The Indian markets have a long term P/E of around 19 times. As of now we are far away from that number.

We go with what Shankar Sharma told the Economic Times, " Right now Capital preservation is the only goal; forget about bottom fishing".

Pravin Palande is a writer for Forbes India