Maharastra, India (PressExposure) July 03, 2008 -- Ever since markets slid precipitously in January and continued on the downward turn, one has been wondering if the market has fallen enough to see a sustainable trend reversal. Amidst around 7,000 point fall in Sensex from January peak till date, there have been as many as four 1,000-point rallies, including a 20 percent rise from mid-March low to end-April high.
Thus, there have been a few bottoms so to speak, and bottom hunting so far has been a rather unprofitable enterprise with many false starts. Continuing the risky pursuit even then, there are multiple ways to approach this question of bottom.
For most of us though, given the odds of getting peaks and troughs right, the best way, of course, is to evolve an approach that does not effectively depend on searching for tops and bottoms. From a fundamental perspective, trajectory in corporate earnings is the most significant variable that will decide the long-term direction of the market.
Corporate earnings in India have grown at almost twice the pace of GDP in the last five years, and the market's expectations are that earnings growth trend is intact; only the extent of growth in the medium-term is made uncertain by recent macro-economic developments. The most important such development is the change in short-term inflation expectations in the recent past, and which has resulted in a change in the direction of interest rate movement.
To what levels inflation could rise and when it might start showing declining trend is in some way linked to trend in prices of global commodities, chiefly oil. As things stand today, there are reasons to believe that inflation is likely to cool down towards the last quarter and may take a little longer to come within the policymakers' tolerance band. We believe that for clarity to emerge on the impact of the macro-economic challenges on aggregate corporate earnings it will take another 3-6 months. Some clarity will emerge in the upcoming first quarter results, but for more we may have to wait till second quarter?s earnings reports to come.
While the macroeconomic news flow could remain mixed in the near future, one need not wait for the last of the bad news to come out of the bag, as in any case one can never be completely sure, a priori, to make an investment.
The most important lesson from history one can learn about equities is that one should not base one's investment decisions based on prevailing sentiment, feel good factor or lack of it. There is ample evidence in history to show that market bottoms out much before bad news ends, as markets discount future news into current prices or valuations.
Of the many amongst us who wish to time the bottom, only a few will succeed and even fewer on a consistent basis, while almost all of us need to save for future and on a regular basis.
So instead of trying to time the bottom, a better approach would be to systematically invest in a combination of assets that gives us the best chance of meeting our financial goals, which must also include outperforming long-term inflation to protect real value of savings as one of the key objectives. For the reasons discussed above, this is clearly an opportune time to be buying equities for the long-term.