Why shouldn't your investment decisions be guided by market momentum?
Sep 08, 2013

"Markets can remain irrational longer than you can remain solvent" - John Maynard Keynes

It is a known fact that markets are driven by sentiments in the short term and tend to overreact to available information on positive as well as on the negative side. Optimism or pessimism often induces you to invest or holds you back from investing. In the long run markets run only on fundamentals, be any asset class, equity, debt or gold. This is why chasing markets is a bad idea. If you take investment decisions based on what Foreign Institutional Investors (FIIs) are doing or depending on the latest trend in the market; you should revisit your strategies as they may hurt your portfolio in the long run.

This is so true in Indian context today. Over last one month, equity as well as debt markets have seen extremes of volatility. Yield on 10 year G-sec benchmark bond moved in a range of nearly 14% while broader equity markets have swayed in the range of 9%. Flow of foreign money has also been erratic.

Markets seem to be overreacting to the news flow. S&P BSE Sensex tanked in excess of 700 points twice in last 20 days. Besides falling rupee, decision of tightening capital controls had sent negative signals to foreign investors as they feared of even stricter controls on flow of capital. Equity markets had witnessed massive sell-off and yields on 10 year G-sec benchmark bond skyrocketed. Those who would have followed the market move and sold their investments in equity and debt would have repented on their decision a few weeks later. The capital controls have recently been relaxed partially. Moreover, geo-political tensions in west Asia had dragged markets sharply but after encouraging announcements were made by the new RBI governor; markets rallied ferociously again. This goes to show that markets are driven by sentiments, as they always are, over the short term. However, till tangible effects of good or bad news do not come to light, markets fail to resist the downturn or hold onto gains as the case may be.

At present India has been affected due to various factors; the devil amongst them is the Current Account Deficit (CAD). Indian economy faces several challenges such as falling rupee, rising crude oil prices (which threaten to escalate inflationary pressures), lack of reforms and possibility of government overshooting its fiscal deficit target among others.

While markets celebrate announcements made by the new RBI governor, the fundamentals of economy will change only when these announcements would be effectively implemented and achieve their objectives. However, there are several areas such as containing fiscal deficit where the RBI won't have any control and that would be the sole responsibility of the government. Eyeing forthcoming elections, the government has been spending generously. Through August, it has already utilised about 63% of the limit set for the full fiscal year. Crude oil prices will stay under pressure till geo-political tensions in west Asia don't ease. These factors can't be remedied by monetary policy. As remains the question of attracting foreign capital and propping rupee is concerned, growth prospects of the economy and government policies hold the key.

PersonalFN is of the view that, while there is a change in the market sentiment, you shouldn't take your investment decisions by following market momentum. Rather, you would better off following your personalised asset allocation and stick to your financial plan. While others may concentrate on price you should concentrate on quality.

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