The US subprime has also created a risk-averseness and reduced the liquidity in the global markets. It has taken a toll on confidence in the developed markets. This has led to the withdrawal of flows from the emerging markets like India, China and Brazil. In India alone, we have seen an outflow in excess of $10 billion since February '08.
In the last few days, there has been significant selling by all classes of investors—not only hedge funds and mutual funds but also individual investors.
In the short term, there is more pain and the market may test lower indices but in the mid to long term faith can be really restored in the equity market only if the crude price drops below $100 per barrel, inflation comes down to 5-6 per cent from current levels of over 11 per cent and interest rates come down by 200 bps.
How can this happen? The crude bubble should burst either through substantial increase in production by oil-producing countries or by the regulators in the US clamping down on speculators. The US senate has recommended a probe into the runaway commodities. If carried out, it would definitely yield some solutions. The question that remains is whether this will be done.
The other remedy, which lies back home, is the local political equation wherein some kind of understanding between parties will bring some cheer. The global flows, which are running away from the emerging markets due to high oil prices, high inflation and high interest rates, will come back once all the three issues are addressed.
In my opinion, the long-term investor should accumulate directly or via equity mutual funds on all corrections. Equity mutual funds are reflections of the equity market and it is a sustainable long-term growth instrument. Therefore, on a long-term growth, planning equity mutual funds are the best way of investment. Such corrections offer opportunity to invest at attractive valuations.
This is also an attractive opportunity for all those companies who think that their valuations are very attractive to buy back their shares. If they decide to do so, it will send the right signal to the markets. A decision by dlf to buy back shares has seen a huge surge in its stock price.
Other factors to watch out for are geopolitical tensions in the Middle East where the Israel-Iran standoff has occasioned a sell-off in the global equity market. If the geopolitical tension is defused, all global equity markets will surge. And finally, if the US presidential election brings back the Democrats to the helm of affairs, that may also bring back some cheer in the global market.
(Kampani is MD, JM Financial Consultants.)