The stock markets are on a roller coaster ride. Over the past month, the S&PBSE Sensex, an indicator of the stock markets, has seen upward and downward movements of a few hundred points on consecutive days. And the ride seems to never end. The truth is, we are experiencing volatile times, which is reflecting on the stock market.
A number of factors that are responsible for the market volatility. The key ones are:
*With the general elections due next year, there is uncertainty on the political front;
*The rupee, which is intrinsically linked to global currencies, has been impacted by significant fluctuations in global currencies and in global commodity prices;
*The US Fed is expected to taper down the quantitative easing (QE) programme which will significantly impact the global liquidity situation. There is also an issue with the US borrowing programme with the ruling and opposition parties in the US tussling about the need to borrow more. While this has been temporarily resolved with the opposition giving in to further borrowing till early next year, post this cutoff date, the issue will arise again leading to further volatility.
*The Indian economy is going through its own issues with rising inflation being a point of worry, a high CAD and falling GDP growth rate.
If volatility scares you away from the market, think again. Volatility is actually a good situation to take advantage of. Volatility tends to mis-price assets, providing attractive opportunities for an agile stock picker. There are two key aspects to stay focused on during such conditions: asset allocation and targets
Maintaining your asset allocation becomes a key trigger to play volatility. Let’s say you are an aggressive investor with a debt-equity asset allocation of 20-80 i.e. 20% of your investments are in debt while 80% is in equity. Now when markets move up, simply sell equity and invest in debt to the extent of retaining your asset allocation and do the reverse during market downturns. This strategy uses the well-accepted investment philosophy: ‘buy on bad news and sell on good news’.
One of the most acceptable indicators to see if the overall market is over or under-priced is the PE multiple. Assuming that the Sensex has a five-year average PE multiple of 15 times and if the Sensex is now trading at 17 times, sell part of your equity holding and move