Why equities still makes sense?

Tue, 20 Dec Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Equity as an asset class has been brutally battered in the year 2011. Unfavorable interest rate environment, policy paralysis and the emerging European debt crisis has taken a huge toll on the markets. Post the recent correction; even people who had invested at the peak of 2007 or 2008 are seeing massive erosion in their wealth. With investor sentiments hitting new lows, some of them are considering exiting the markets as they see no ray of hope in the near future. But is the exit option at this juncture a sensible move?

Agreed that uncertainty factor is at the peak right now, but exiting at a juncture when pessimism is riding high can rob the investors of the long term opportunity. With heightened market volatility, the exit option appears to be even more lucrative for naive investors. This is because in the current higher interest rate environment many fixed deposits and debt mutual fund schemes are offering returns in the range of 9%, thereby enticing investors. With global environment not showing any signs of improvement, investors have lost risk appetite and are looking for assured returns. Thus, the urge to exit their equity investments and park money in relatively safer debt instruments is at the top of their mind.

However, there have been indications that the current pessimism is not likely to persist for long. Prominent one was the RBI's decision to hold on the interest rate in the current monetary policy review. It gives us an indication that the rate tightening cycle has probably come to an end. This happens to be a huge positive for the market as high interest rate environment was hurting the investment cycle of corporates. Secondly, even commodity prices including crude oil have shown some signs of easing which again is encouraging. Further, Rupee depreciation has also come to a halt after Reserve Bank Of India's (RBI) intervention. Although the domestic issues on policy making have significantly impacted the ease of doing business in India, steps are being taken in that regard. Execution of land acquisition and mining bill was a prime example of that.

The current set of events signify that turnaround is probably on the cards. Thus, investors should keep in mind that one should not be deterred of equities just because of the near term volatility. Systematic investment and patience over the longer term seems to be the right approach.