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Take a longer-term view

Take a longer-term view and avoid trading ? which will invariably lead to losses for most uninitiated investors.

india Updated: May 19, 2006 11:34 IST

The last few days have seen significant volatility in the stock market. This follows many months of a secular bull run, based on a solid platform of economic growth, robust across the board earnings, growth in the corporate sector and extremely strong global and local liquidity. As the market rose and hit round number targets on the BSE Sensex, investors wondered how long it would last and when would the correction take place. We have a correction of sorts happening now.

What does it say to me in terms of market direction for the future?

Fundamentals are still intact. Consensus economic growth expectation continues unabated at around the 7 per cent plus mark. Recent earnings numbers have come in at or largely above expectations. Global attention to India as a result, stands undiminished. Despite short-term stretches in valuation, I remain convinced that the longer term investor does not have much to worry as long as he is sitting on a reasonably diversified portfolio with return expectations in the 15 per cent to 20 per cent range. In the context of the longer-term investor, any pullback in the market provides opportunity to buy.

The short-term picture is a little bit more confused, for it is much more determined by investor psychology and panic thresholds. A lot of the global liquidity in India is also constrained by views and trends on emerging markets as a whole, and is potentially short term in nature. With global commodities looking a bit weak and also global markets following a weaker trend, inflows into India are likely to be challenged in the near term. Local liquidity is historically based on a bull market psyche, which is platformed on shaky memories of strong rises and sudden collapse. Local investors will invariably get nervous sitting so near the market and not being able to distinguish the woods from the trees sometimes. As a result of short-term liquidity constraints, we will, I believe continue to see volatility.

I would advise investors to sit back and not chase the market. When it falls by a significant level, review holdings and fresh opportunities in the market and accumulate into such falls. Take a longer-term view and avoid trading – which will invariably lead to losses for most uninitiated investors.