The Indian equity market followed suit. These are extraordinary times: the global economy is reeling under pressure owing to slower-than-expected recovery in the US' economic growth and possible sovereign debt defaults in the eurozone.
Major indices across developed and emerging economies corrected between 6.0%and14.0%in the first week of August.
Owing to selling pressure in line with global events coupled with the shock of the recent hike in domestic policy rates,Indian equity markets have corrected heavily.
But in all this, what will happen to your investments in the equity market?
Should you use the opportunity and start investing or should you pull out and contain further loss that you may incur? The answer is a long-term investor need not worry about short-term volatility.
INDIA STORY ON TRACK There is little reason to lose hope in India's growth, especially with policymakers and regulators assuring about the country's growth story The slowing global growth will have an impact on GDP (gross domestic product) growth. “India's economic growth for this fiscal is likely to slow down to 7.6% on account of high interest rates, near full-capacity utilisation and high inflation impacting investment,“ said Leif Lybecker Eskesen, chief economist for India and Asean, HSBC Global Research.
“While India's growth outlook is clearly worsening, relatively India continues to maintain its position (if not improve) among global investment destinations,“ said Prateek Agarwal, chief investment officer, ASK Investment Managers.
Consumption-led demand: Demographics in India are such that the working age population is expected to grow. According to a Harvard working paper by David E Bloom, Population Dynamics in India and Implications for Economic Growth, the ratio of working age population to nonworking age population will peak only around 2040. With a fast-growing young population, consumption-led demand is unlikely to slow down.
Low dependence on exports: What also works in our case is low dependence on exports, which account for roughly 20% of the GDP.
Lower inflation expectation: Slowing global growth may lead to lower commodity prices, thereby lowering inflation expectations. “The rise in commodity prices globally was exporting inflation to India,“ said Krishna Sanghvi, head, equities, Kotak Asset Management. “The current uncertainty may lead to fall in these prices, proving positive for us in the context of monetary tightening.“
It's not the same as Lehman crisis: If you are concerned about a repeat of recent history,those fears are uncalled for.
“During the Lehman crises, global lending had dried up leading to a domino effect,“ said Sanghvi.“This time there are no such fears, hence it is different.“ Moreover, the 21.3% crash in domestic equity markets after the Lehman announcement lasted nine months and the market recovered at least 33.0% over the next nine months.
WHAT YOU SHOULD DO Markets have corrected almost 10% in two weeks and this is a rare opportunity that you should use to top up your SIPs.
If you are waiting to start your equity investments, don't be deterred by the volatility. In the event of such volatility it also makes sense to spread your investments. You can start by investing 30-50% of your surplus now and then stagger the rest over the next four-six weeks.
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