Investors have been subjected to a lot of negative news in recent months, which brought back unpleasant memories of 2008 and early 2009. Greece, which not so long ago was a source of pleasure as a holiday destination, is now referred to more in the context of the pain it has inflicted on financial markets.
Along the way, investors have been subjected to the new acronym of PIIGS (Portugal, Ireland, Italy, Greece and Spain) — economies that face the risk of sovereign default. Fears are also being expressed about the demise of the European Union and the euro. The accompanying volatility in the markets would cause any investor to throw his hands up in disgust and get off the ride.
The truth is that market volatility, as can be observed in data, has not really spiked out of the range it has been in since the middle of last year.
And this range is no different from the one that persisted during what we fondly remember to be saner times — say, during 2005 and 2006 — and far lower than what prevailed during mid-2007 to mid-2009.
But the non-stop flow of information has sensitised us and, hence, there's a perception that market volatility is extreme. It’s more in our minds. So, what should an investor do?
Current market volatility is not abnormally high, but one cannot wish away extreme market volatility and neither can we wish away our emotions.
The best way to participate in equity, which has the potential to deliver higher returns, is to invest on a regular basis for as long as you can, your risk appetite permitting.
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With the market almost unchanged over the last nine months, valuations have corrected 10-12 per cent with the Sensex now trading at about 15.5 times 12–month forward earnings. Valuations are still not in the cheap zone, but pockets of value are visible.
One caveat: The forecast 24 per cent earnings growth for 2010-11 is significantly driven by the commodity companies and they are likely to witness downgrades if the recent weakness in commodity prices persists.
In the near-term, expect global correlations to persist. Incremental news and data point to downside risks to global growth. The economic fallout on India is likely to be limited, but expect some sectors and companies to be more affected than others. That is the nature of a global world and companies that are increasingly global in nature.
The good news is that the secular tailwind will support investors who are willing to take a longer term view.
The author is head of equity funds at Religare Mutual Fund