JUST A PASSING PHASE

In the last couple of weeks we have been witnessing a considerable increase of volatility in the equity market. And this is not limited to China’ market alone, which happens to be the epicentre of such volatility.The US, Europe, Japan, and not to forget our domestic market, have all been impacted by this rather aggressive movement. The volatility index or VIX in the US rose to levels not seen since the financial crisis. Even in India, last week it was at the highest level over a period of 15 months. Amidst all this, the equity indices lost more than 10 per cent of their value in the past few trading sessions.

These situations always raise doubt among retail investors as to whether they should remain invested in equity. This is because many of you might be staring at loss in your portfolio and many of you might be wondering what to do now. Before answering that question, first of all let us understand the set-up that has created this volatility and how long is it going to persist. As with many things that have had a Chinese origin, the recent choppiness in the equity market also comes with the ‘Made in China’ tag, triggered by the devaluation of the yuan. When everything else failed to lift the market there, the PBOC took this step under the disguise of liberalizing the Chinese currency. I believe this step is not going to yield the desired result and the Chinese economy has changed its growth trajectory in a more permanent manner.

Double digit growth is a thing of the past and lower single digit will be the new normal. The Chinese economy currently is pegged around USD 10.36 trillion (2014). The only country that has an economy larger than this is that of the US, the size of which is USD 16.3 trillion. Now let us draw a comparison about how the US economy grew once it had reached the size of USD 10 billion. The US economy was of the same size at the end of 1996. Since then its economy has not exhibited a growth of more than 5 per cent and the median growth has remained at 3 per cent. Although both economies are as different as chalk and cheese in terms of political establishments, demography, culture, institutional framework, etc. I feel the base effect will definitely kick in and make it difficult for the Chinese economy to replicate its past growth rate. One needs to accept this new normal and adjust expectations accordingly.

The current global set-up (Chinese economy slows down; US economy is picking up but at a very slow pace; Japanese economy contracted in its recent quarter; and the European economy is still not out of the woods) presents a unique situation for India, wherein it can lead global economic growth. Although some cynics will argue about our own decelerating economy, I am confident it is matter of only a few quarters before the Indian economy starts growing more than 8 per cent again.

Some of the recent actions initiated by the government point to the fact that the right steps are being taken to accelerate the reform process and make India a business-friendly country. First, the government allowed the land acquisition ordinance to lapse in order to get out of a political stalemate and allow greater flexibility to the states. The second big step taken by the government in the right direction was acceptance of Justice A P Shah’s recommendations that Minimum Alternate Tax (MAT) should not be imposed on overseas’ portfolio investors retrospectively. This speaks volume about the government's intention towards resolving the contentious issue and moving forward.

All this makes me confident that though we may not take a different course altogether from the world economy, we will definitely outperform global economic and equity growth. Therefore, all of you who are nervous due to the continuous fall in equity indices should hold your nerve and not liquidate quality stocks; rather this is the time to add more quality stocks available at reasonable prices.

One of the ways to protect your portfolio is to avoid investment in shares that can give you capital loss. With the rupee having already depreciated by a little over 3 per cent against major currencies in the last 15 days - and fall has not been done yet - you should avoid companies that are net importers and have foreign currency loans in their books. Our cover story this time talks about the same strategy along with recommendations of companies that you need to stay away from.

In addition to this we are also carrying an analysis of Amtek Auto that was in news for all the wrong reasons. The analysis will help you to cut through the noise and take a sound investment decision. With lot of IPOs hitting the market recently and many more to come, what is the strategy you should adopt while applying to these IPOs is what has been discussed in one of our special reports.