From the Ring. How to deal with volatility

The current year has been a challenging one for equity investors, led by weak earnings, monsoon worries and global factors. However, we expect the earnings trajectory to improve in the second half of this fiscal. Regardless of how things pan out, investors should not get jittery with the volatility and believe in the long term growth story of the economy.

Investors should not trade frequently and avoid panic selling at early signs of volatility. Disciplined investors should avoid moving in and out of stocks, as it could cause losses.

Investors should also stick to good quality stocks. In volatile markets, companies with shaky fundamentals may see huge swings, sometimes based on rumours. Diversification is the most foolproof method to handle market volatility and maximise risk-adjusted returns.

The portfolio should not be concentrated in a few stocks; it must be well diversified across sectors and market caps.

Retail investors should resist the lure of making quick money in the market. Trading on the basis of rumours and unreliable tips should be strictly avoided as you may get trapped in bad stocks.

Creating value Many equity investors tend to commit the basic mistake of trying to time the market when it is volatile.

Equity markets usually create value for investors over the long run. Hence, investors should be disciplined and consider investing regularly in high quality fundamental stocks.

I believe that markets are well positioned for a mega rally as lower crude prices and inflation, political stability and revival in the investment cycle would help improve earnings growth in the coming years. Increase in US interest rates, negative news flow from the Euro zone, monsoon jitters and spike in crude prices could act as intermittent short-term risks.

However, the Fed is likely to be more careful in managing rate expectations, and low US inflation should enable it to raise rates very gradually.

Crude prices would also remain low, led by huge global supply and low marginal cost of production. The government too has sufficient food grains in stock to tackle any shortfall in production, which resultantly will not increase food inflation. With inflation remaining under control, the RBI will have enough headroom to cut rates significantly in the coming quarters.

Benefit of reforms Government reforms are also likely to drive markets as many of them are structural in nature. For example, the coal auctions will really help increase the coal production in the country, the benefit of which will be multi-fold. Also, the focus on reducing the bottlenecks in the infrastructure space and improving the ease of doing business will start reflecting in corporate earnings with a lag of few quarters.

So earnings is expected to really grow at a rapid clip over the next two-three years, led by policy actions and reforms.

The writer is Managing Director — Institution, Angel Broking

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