In the language of traders, what the Indian equity markets are seeing now is a ‘relief rally.’ The idea is that markets are rising not because of the presence of good news but rather the absence of bad news. They’re relieved that the situation has not turned out to be as bad as they had feared. Equity traders were apprehensive of the results that would be adverse in different ways but are now feeling relieved and are buying stocks at higher prices and so, this is called a relief rally.
However, the headlines tell us that the business and economic news are not good. The rate of GDP growth has dropped to 5.8 per cent over the January-March quarter –– the lowest in five years. The news from sectors like automobiles is alarming with bellwether Maruti’s sales shrinking by 22 per cent over a year ago, which is the worst drop in seven years. Corporate numbers are in the doldrums and any strength in stock prices are making equities overpriced than they are. More broadbased indicators like direct tax collections are also suspect.
It’s the kind of time people are advised not to invest, and to hold on to their cash and keep it in safe havens like banks and liquid funds. If you scan the investment media, there’s no shortage of advice of this sort and all of it sounds balanced, sensible and cautious. It’s also completely wrong.
If one takes a long view, then the conclusion could be the opposite. This is a great time to invest. The reason is simple: the near-term outlook is not great but the longterm outlook is fabulous. Some reasons for the near-term being shaky are given above. However, the reasons for the long-term outlook being good is simply this government’s track record on tackling fundamental economic and business issues over the past five years. It’s a little bit like analysing a company and saying that the details matter less than the management
For the individual investor, it’s pretty obvious what path to take. Keep investing steadily, ideally through SIPs, ideally in a small set of equity mutual funds. Through good, medium and bad times, that’s the route that’ll give you the highest likelihood of meeting your financial goals.
This raises an interesting question: what would have been the right advice had the election results been different? What if we were currently in a situation where ministries were being sold to the highest bidders in a coalition government and power brokers were running amok in Delhi as they used to in the past? Most of us have heard those infamous phone recordings and so know what used to happen.
What would I have written here in that case? That’s the really interesting part –– the correct investment advice would still be exactly the same! As an individual investor, your investment plan would be pretty much useless if you had to predict future events and modify them. This has nothing specifically to do with these elections. It applies to all external events. Why that should be the case, and how you can ensure that you stay on course? That’s a story for another day, soon.