Uncertainty rules global markets. Investors are running scared. An all-pervasive fear psychosis seems to have gripped people in the US and emerging markets. Comparisons are being made to earlier crises like the Asian one and the collapse of LTCM. Everyone is apprehensive that what is visible today, in terms of the sub-prime mortgage situation, is just the tip of the iceberg. The pendulum has swung from greed to fear.
Generally, such panic conditions are good buying opportunities for cool-headed investors. The problem this time is that it is difficult to predict the exact magnitude of the crisis. In a market susceptible to bad news and prone to believing the worst, it is difficult to go out and buy aggressively. After all, it does not feel good when stocks tank after you buy them. The comforting fact is that we are holding out pretty well out here. Despite all this volatility, the Sensex is down only 6 per cent from its recent highs; that is hardly a major fall.
Mid-caps, too, have weathered the storm well so far. There has been no manic unwinding in the stock futures market either, like in May 2006. This is not to suggest that any of this will not happen going forward, but so far things have been pretty okay. Going by the sharp swings, it may appear that the bottom has fallen out of the market; the truth is we are down only a bit from the top.
The next few days are important. The market will be overly sensitive to news from the US financial space. If more skeletons tumble out of the closet, the sell-off may intensify. The next few days are also important for investors. There may be moments of panic, depression and even hopelessness. You need to keep a cool head. Go easy only if it begins to resemble a full-fledged global contagion and look beyond the noise to come to that conclusion. Else, if the market sells off here, it may be the best buying opportunity of 2007. No hurry, but keep some cash handy.
(The writer is Executive Editor, CNBC-TV 18)