WHAT DO INVESTORS DO NOW?

So, finally the dreaded inflation number has crossed double digits. Not barely crossed it, but has done so by a considerable margin. Stock markets have expectedly crashed and analysts are screaming "the sky is falling". So what do you as an investor do now? It actually depends upon your timeframe for investment and your reasons for investing in stocks. If your goals are long term in nature such as planning for retirement or children' education, it makes little difference to you how the Sensex reacted today.

Just forget about the markets for a while. Sit back and take stock of the situation. OK, inflation is at 11 %. Did it jump from 6 % to 11 % overnight? No, it took about 6 months to do so. If inflation was increasing continuously for months and the trend is now continuing there is nothing strange about it. What is it that is so sacrosanct about the double digit inflation figure? I cannot believe that inflation at 9.9 % is OK, but at 10.1 % it is going to wreak havoc on the economy. I am not trying to make a case that inflation is good or that it will not affect the economy. What I am saying is that inflation is a fact and that the markets have already fallen by more than 30% from their peaks, simply discounts that fact.

Can markets fall further? Maybe. Will markets eventually rally? Certainly. Take a look at the positives. Since, even the worst case scenario for the economy paints GDP growth at 7 %, I see no reason to believe that we are in a recession. If the markets can consolidate at current levels, waiting for inflation to come down and interest rates to stabilize it may not be such a bad thing for investors. By now the froth is out of the system, speculative positions are low, IPO' are dead, the panwalla is no longer talking stocks. If you have cash waiting on the sidelines, the time to invest a portion of it has come. You could invest 25 % of your cash in high quality businesses, using this window of opportunity. There are plenty of opportunities available, where outstanding businesses are quoting at reasonable valuations. Even if you do not invest, it would be a mistake to panic and sell out now.

Advance tax numbers point to a significant growth in corporate taxes. This cannot happen without profits rising. Again the investments in capacity creation that India Inc. has made in the past few years are about to yield results as this capacity goes on stream. Again it is expected that inflation would come down somewhat as new farm yields hit the markets. I am in no way trying to make out that all is hunky dory with the economy. But it is not a doomsday scenario as many would have us believe. I am simply trying to bring a sense of sanity to the all round fear factor prevalent in the markets. Luckily the crash happened on a Friday. We have 2 days to put things in the proper perspective and then decide our course of action. An old wall street saying comes to mind " Buy when there is blood on the streets, even if it is yours".