How to survive in choppy markets

Anyone who has seen the one way movement in the markets for most part of calender 2007 is perplexed at the choppy behaviour of Indian stock market eversince the beginning of 2008. As most investors are governed by strong emotions, it is very diificult to survive the choppy markets. If we do not develop the survival instincts we will tend to loose huge money in this uncertain environment.

What went wrong with the 'India growth story'? Overseas fund managers have withdrawn more than US$3 billion during the first three months of 2008. The adverse turn of events on the global economic front are partially responsible for this turmoil. Emerging markets are grappling with higher inflation as the commodity prices have risen to new highs. Crude prices hitting new highs is a double whammy for net importers like India: High oil prices coupled with the falling rupee is putting pressure on the fiscal deficit of the govt. The falling rupee has also increased the risk aversion of FII's vis-a-vis India, because they find better opportunities elsewhere for the time being. There is a reasonable consensus among analysts for a slowdown in Indian GDP growth to between 7-7.5% this fiscal.

The individual investor is caught at the crossroads, baffled and bruised. For those who have invested for long term it is a time to forget looking at the indeces for a while and relax. Things will start to improve within the next 4-6 months. For the active investors it is time to do some portfolio churning. Everytime there is a change in the economic fundamentals, different sectors take the lead on the markets. The performing sectors of 2007 like infrastucture, power media and reality have become laggards, and the laggards of the last bull run like Pharma, FMCG and Technology have taken over the leadership mantle. The sensex has fallen about 25% in 2008 till date, but sectors like capital goods (infrastructure, power etc.) have declined over 40%, whereas media sector has declined by over 40%. On the other hand Pharma has given a growth of 14%, and returns on FMCG and IT sectors have been marginally negative.

So it can be seen from this data that we can survive bad patches in the markets by following the principle of portfolio churning.