It's A Good Time For Retail Investors To Enter The Market

Recently, stock markets plunged by more than 3%. The Sensex's fall of 855 points was the biggest since 2009. During the next two days the markets fell and it was only yesterday that the trend reversed.

I met Kumar on Friday and he was wondering what he should do – should he buy more shares or sell the bulk of his holdings in case there was a crash.

Share prices are based on perception and not on reality. If it is perceived that a particular company is good, its prices will rise while another equally good company's shares will fall or remain stagnant.
This perception is based on a number of factors – the company's dividend policy, bonus history, the industry the company is in, its management and of course one's reading of the economy and interpretation of government policy. It is these that led to the significant improvement in share prices in 2014.

Let us look at India dispassionately in the present scenario.

The fall on Tuesday occurred because of global uncertainties. Crude oil prices fell which created some uncertainty in global markets. It was felt that as a consequence of the fall, oil exporting countries may invest less in emerging markets such as India which could lead to a fall in share prices. There was also some concern that Greece might exit from the euro which may lead others like Spain to also exit. 

The concern in this case was that this could hurt India's exports. That may be, but it must be underlined that the Indian economy is not yet in trouble though there is are some concerns regarding the high interest rates, manufacturing revival and inflation. I do not think it wise or even warranted to sell in a hurry. It is foolish to sell at every reaction.

On the other hand, there are times when the share-plunge can be an opportune time to buy value stocks as the fall (as in this case) was not due to local happenings. I would recommend that when buying it is important to take a stock-specific approach. With the dollar appreciating it may be good strategy to buy shares of companies that export to the United States. Another sector that I am bullish about is infrastructure. At last everyone has realised that if India has to grow, infrastructure has to be improved and large amounts are going to be spent in developing roads, bridges and the likes. Infrastructure companies will do well. And this activity has to be financed. Therefore, banking shares should also do well though I do not think all banking shares will prosper. One should take time and choose which ones to purchase.

If you are a long-term investor, then it is wise to purchase selected shares whenever they fall.

If one is a little cautious it would be prudent to wait till the Reserve Bank of India's monetary policy gets announced in the first week of February. That is not too far away. And if interest rates fall, share prices, in anticipation of a revival of industrial growth will rise. But if you are a bit of a gambler, then it may be wise to buy shares now in anticipation of the fall in interest rates which has to happen very soon. 

The RBI governor has said he would review the situation and it is possible that interest rates could be reduced. The finance minister on the other hand has said that reviving manufacturing, diversifying its base and equipping it for robust long-run expansion would be crucial for India's growth prospects. This cannot happen without a fall in interest rates.

A fall in interest rates will benefit those who have invested in fixed income securities such as gilt and bond funds. These have risen during the last year by a little over 16%. These can be good in the long term.
I feel this is a good time for retail investors to once again enter the market that they exited several years ago as apart from anything else there is hope and optimism and anticipation of good things happening.