Be A Marathon Winner

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The current volatility in the market has been a function of external factors such as the global financial crisis and the global loss of love for risk that triggered tremendous outflows. There have been some concerns on the macro side too. Till the time the markets keep on getting hot international flows from absolute return investors, volatility in markets would persist. Furthermore, the improved retail flows and encouraging longer term flows from international investors would go miles in mitigating this volatility.

Taking the global scenario into consideration, the recessionary and deflationary scenario would probably continue at least till Q4 of 2009. The positive impact of monetary and fiscal stimulus would start kicking in after that. Hopefully the recovery would start in Q1 of 2010 and beyond. The current global financial crisis would last for a while into the end of 2009, at least. However, the revival of housing and asset markets in US is a pre-condition for pick up in the consumer demand. And the continued monetary/fiscal stimulus by US and other central banks in the world would have a positive lag effect on the economies.

Meanwhile, although the fiscal stimulus announced recently is not very big, it will have a positive impact on the real economy with a lag. We expect more pump priming from the government and monetary stimulus from central banks in the form of interest rate cuts. This would hopefully stimulate the demand and economic growth in the medium term. But one also has to note that India’s fiscals are already stretched, and this stimulus may lead to the fiscal deficit moving substantially higher.

As for the impending general elections, well, they hardly matter in terms of market movements over a long term. If you go back into history, India has survived so many political upheavals, wars, assassinations of state heads, etc. and even so the long term historical average of the real GDP growth rate remains at around 6 per cent. To us any political party or coalition government voted at the centre may not really slow down the reforms agenda.

The IIP Factor
Recently, the CMIE had pointed out some flaws in the way the IIP is computed and the fact that it was not fully representative of the structural changes that are taking place in the Indian economy. The IIP has slowed down considerably in line with the slowing economy. Hopefully, as the monetary and fiscal stimulus works in the economy, and the global economies revive, IIP over a period of time should show some improvement after hitting a trough. We being long term investors, there is no need to worry about quarter over quarter results which tend to be very volatile.[PAGE BREAK]

And in respect to interest rates, I agree on the RBI’s focus being more on growth rather than inflation. We feel that the RBI will further cut rates to stimulate demand and growth as well as to address the credit freeze issue. Banks largely would derive benefit from lower interest rate to the extent of their bond holdings, the value of which rises due to fall in interest rates.

Tip Time
In conclusion, our advice to the retail investors is to continue investing in stock markets in a disciplined and regular manner. Patience and discipline are virtues of investing during uncertain times. And it makes sense in investing in markets through mutual funds that focus on keeping the costs lower for the investors and are backed by a solid research and investment process. At Quantum, for example, we have a bottom up approach to investments. We are value investors and we focus on a long term horizon. Our time-tested, disciplined and process-driven research process helps us to build up a portfolio in which the average holding period of stocks is 2-2.5 years.

Parting Shot
So, if you want to win the marathon, you may have to lose the sprint. Therefore, stay invested for a longer period of time to generate real wealth.