COURTESY: THE BUSINESS ENTERPRISE LINE. Pray, who began buying equities in middle-2010, is concerned. With almost 25 % shaved off from the BSE Sensex’s November 2010 top of 21,005, the markets now appear to be on a downward spiral. Pranay’s portfolio of blue-chip stocks, acquired after a good deal of research, has also taken a sharp knock.
Adding to his unease is the opinion in some quarters that the marketplaces have joined a bare stage. Unnerved, Pranay is thinking of liquidating his equity investments to cut losses, and completely steering clear of the stock market also. Is this the right decision? What’s a keep market? First, consider what constitutes a bear market. A sharp, prolonged decline in the price of assets (shares, regarding equity marketplaces) is a defining feature of a bear market.
Though not cast in rock, it is generally believed that whenever equity marketplaces fall over 20 per cent using their peaks, they may be in bear territory. By this yardstick, the Indian marketplaces having lost greater than a fifth of their value since last November, could be said to be in bear zone.
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However, this fall has neither been continuous nor continuous (as yet), and has been interspersed with some strong comebacks – the latest in July when the Sensex shut above the 19,000 tag. So, speaking strictly, our markets still involve some way to go (down) before being categorized to be in the ‘carry category’. That said, a growing sense of despair – another leitmotif of bear marketplaces – is starting to make its existence sensed in the Indian markets, with many participants having a poor outlook on the future direction of the bourses. Such pessimism is often self-feeding and results in spiraling market declines. Bear markets will vary from ‘corrections’.
The last mentioned are relatively small declines in prices, do not last long, and mainly serve to remove froth (unjustifiable price increases) out of overheated markets. Bear marketplaces, on the other hands, result when fear sets in among a big portion of the trader community about the near future leads of the economy and companies.
A deterioration in economic fundamentals, which effects the leads of companies is often the trigger for keep markets. For instance, the recent razor-sharp market dip in India has been precipitated by a steep rise in organic material costs, rising interest rates, global financial uncertainties, and doubts of a home slowdown. The uninspiring results published by India Inc. in the recent quarters have added to the pain also. With panic setting in, even stocks of companies that are otherwise sound are beaten down hard.
During the last major keep market witnessed by the Indian bourses in 2008 and early 2009, the Sensex tanked from around 21,000 to below 8000, dragging down in its wake the bluest-of-the blue chips. Bear markets can have a serious detrimental effect, both psychological and financial, on traders. Some such as Pranay in the example above lose all appetite for investing.
However, this might not be an optimum decision, for in adversity lies opportunity often. Market cycles turn, slowly but surely and bear markets sometimes, once they run their course, inevitably cave in to revivals. Given that equity as a secured asset class has proved itself to be among the best wealth-generators within the long-term, investors would prosper to continue allocating a portion of their assets to equity. For the discerning investor, keep marketplaces may provide attractive opportunities to pick up good shares cheap. Being greedy when others are fearful could be very profitable in the long-run.Head wear said, it might be impossible to predict when the market has strike rock-bottom.
A bear market can be like a falling knife and attempting to catch it could leave your hands bloodied. So, rather than attempting to ‘time the market’ and investing a lump-sum at a perceived bottom, investors may be better off implementing a policy of staggering their buys and purchasing on dips. Unit cost averaging (reducing overall average cost by investing same amounts periodically to buy more at lower rates and less at high rates) can be put to good effect in bear markets.
However, caution must be exercised. Not everything available cheap has value. Some questionable stocks, which may have run up sharply in buoyant market conditions also, will invariably be beaten out of form in bear markets. Such shares may be de-rated and may likely languish even following the market revives permanently. There are umpteen types of shares which revived using their 2008 and 2009 lows never.