Equity Investing: Beware of irrational exuberance!

The economic growth momentum in India is fairly robust, and India continues to be an attractive investment destination for FIIs in the long run. But the negative sentiment from the Euro zone is weighing heavily on our markets, from a short to medium term perspective. The intermediate trend of our equity markets has turned negative and hence investors are advised to tread with caution. It is human psychology that we do not react to early warning signals, but wait for the time when we are forced to accept the reality. It happened when the 'Sub prime' crisis unfolded in the year 2007, and it is happening again with respect to the Greek sovereign crises.Ultimately, the markets will have to accept the reality, and adjust according to the impact of the crisis. I have a feeling that slowly the feeling of desperation is gripping the equity markets. In any case, the markets have discounted most of the positive news, however, a major downfall has been avoided due to the existence of excess liquidity in the markets.

Equity markets ride on the risk appetite of the global investors. The risk appetite takes a beating with negatives emerging on the economic scenario. The situation in Euro zone has reached alarming proportions, and the contagion affect will see the 'Greek crisis' extending to other Euro zone countries. Euro zone also continues to face the wrath of nature with volcanic ash clouds continuing to pose a threat to the Airline and Tourism industry. The current downturn in the equity markets should be viewed in the above context. Whenever their is a news of bailout packages, the markets tend to rise rapidly. This can only be treated as 'irrational exuberance', and investors should not get carried away by the bounces. Volatility in the equity markets is on a rise, and is likely to rise further. Major sectoral indices like Oil & Gas, Metals, Banks have turned negative. The markets are not expecting any immediate drivers for revival.

I continue to maintain that investment in Indian equity markets is the best bet for 'wealth creation' over a period of next 3-5 years. But investment needs to me made in a staggered manner. It may not be a bad idea to start an SIP (systematic investment plan) at this juncture. For those investors who would like to invest in direct equity can also use the SIP method to buy their favourite stocks. If you want to buy 100 shares of a company, buy it in four lots of 25 shares each, which will reduce your average cost if the market moves down. The markets are likely to remain in a corrective mode for at least the next 2-3 months. The trigger for revival of the Indian equity markets will only come with the advent of a normal monsoon and easing of inflationary pressure. The impact of the Euro zone crises will be marginal in the long run, as Indian economy is largely driven by domestic demand and has little dependence on the Euro zone. For the present it is most likely that our equity markets are heading for at least a 10% correction from the current levels.