Fintotal News Analysis | Equity Markets - Boom or Bubble?
Equity Markets - Boom or Bubble?
, 21 Sep 2010

What's happening?

The Indian equity markets are near their all-time high levels reached in early January, 2008. The NSE Nifty, for instance, closed on 21 September 2010 at nearly 6010, just about 5% short of its all-time high of 6287. By many measures, including common sense, this is surprising. Today the Western and Japanese economies are still struggling to get out of recession. They are pulling down export demand, not to mention investor confidence. There are concerns over a Chinese slowdown too. India itself is experiencing high inflation - not exactly the most salubrious climate for investment and economic growth. Yet, equity markets are near their pre-crash peaks.

We believe that most of the current 'boom' is due to hot money flowing in from abroad. Weak economies in the West, coupled with individuals and institutions sitting on abundant funds are leading to too much money chasing too few investment alternatives. In finance jargon, this is called a 'technical rally' as against one based on fundamentals. We do not believe this bodes well for the medium to long term health of Indian markets and its investors.

What does it mean for me?

A common question investors ask is whether to book profits at the current highs or hold it out. The media is filled with 'experts', some of whom believe another crash is near, while others are confident this is the beginning of another bull run. We believe that neither camps 'knows' - both are simply throwing darts in the dark.

First, as investors you must realize that most of these 'experts' are actually brokers. They do not really care whether markets move up or down or whether you lose or make money. They earn their money from brokerage as long as you trade – whether it is a 'buy' or a 'sell'. Thus, they have a vested interest in exaggerating the euphoria or the fear to encourage you to unnecessarily move your portfolio around.

From a more unbiased and rational viewpoint, we would say - we really do not know which way the markets would move. Nobody does, though many pretend they do! Instead of losing sleep over this, answer the following question about your portfolio: how much of this money do you need for consumption in the next 3 years?

If there is some money you need within 3 years - for example a wedding coming up or planned retirement - this is a good time to start moving out of equity and into debt for that portion of the money. If you do not need money in the near future and are simply building your wealth, stay invested. Be rest assured that with India's long term growth story in a firm footing, your wealth in equity will continue to grow. There may be short-term corrections, but you can weather them easily since you do not need the cash immediately.

Remember, when markets crashed as much as 60% in 2008, many people, including these 'experts' believed it was the end of the equity market. Yet, in less than 3 years, markets have repaired the damage and are back to their scorching highs. A disciplined investor would have gained in the last 3-5 years, while someone who panicked in 2008 and withdrew would have lost his shirt.

In summary, go by whether you need the money for consumption or not - do not worry about market levels.

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