Let’s see what all has gone wrong and may get even worse –

–          Rupee has depreciated to 60/ dollar and may drop further
–          The drop in rupee is causing imports to become more expensive, which is keeping the inflation high.
–          High inflation is causing the RBI to keep interest rates high, which in turn is depressing growth rates
–          High current account deficit is causing the rupee depreciate and can also result in a balance of payment crisis (similar to 1991)
–          The government is running huge fiscal deficit which crowds out private investment. In addition, it does not have the same ammunition as 2008 to counter any slowdown
–          Corruption and governance issues remain and there is no will to change it in the future.

Have I missed anything negative? It is actually a surprise that markets have not dropped further. Actually, let me take that back.

The midcap and small cap index has dropped by 15% and 22% respectively and large caps have not dropped as much, because FIIs have been pumping money (which has now started reversing). So we could have another crisis if the FIIs, were to sell even more in response to the falling rupee.

I think most of you know all this and need not be reminded about it.

Panics are always around

Lets look at a graph

Capture1

This look like the index from 2008 to 2009 …right ?
No, this is the market drop from Feb 2000 to May 2003. The market dropped 38% during this period, with IT stocks dropping even more.

Capture2

My point is that market drops happen from time to time and is the risk of earning high returns. The mistake most investors commit is to extrapolate recent events into the future. An investor looking at the market in 2003 would have missed one of the biggest rallies from 2003 to 2008.

The converse also holds true – something which has done well in the recent past, can go down too.

Capture3

The above graph is not of a stock, but of the favorite investment option of Indians – Gold. Very few would have imaged gold dropping by 20% in 6 months.

Panic is a great time

If you have studied history and can keep a cool head, then panics are a great time to buy. The pre-requisite is that one should have done his or her homework in advance, and is ready to act when panic strikes and drives prices down.

Let me show you a recent mini panic in 2011 – In financials. The market became concerned about the asset quality (rightly so) and knocked down prices of companies by almost 30% in a span of 2 months

Capture4

A person buying during the panic would be up by around 50% since then.

Where is the panic now ?

I think we are in the panic territory in small caps and almost getting there is mid caps. If FIIs start pulling out, we may see a full blown crash across the market including the large caps.

Do I know if that is going to happen ? No I don’t. I do know that prices are getting cheap and it will soon be shopping time.  I may even buy gold if it drops another 20% !!!!

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