The current market scenario has taken everybody by surprise due to the swiftness and extent of the damage done. The equity markets as well as the bond markets have been hit the worst in the turmoil. Most of the global equity indices other than those of commodity based economies such as Russia, Brazil and Mexico are down by 16 - 30% from their respective peaks. India too has witnessed downside for almost 2 months. The fall has been particularly severe in India as the impact of global crisis got coupled with signs of domestic distress in the form of slowing Industrial and Infrastructure growth, decelerating GDP growth, high interest rates, rising inflation, populist budget, etc.
The recent crisis has induced a shift in focus from Growth to Value. Growth projections were reaching maniac levels and a considerable premium was being put on expected growth. Value is the most sought after the fall. Defensive sectors such as Pharmacy, FMCG, and IT etc. have outperformed the broader markets during the recent fall. What people still fail to understand is that equities, though they might be the best performing asset class of late, are definitely not the only investment option. The need of the hour is to identify and explore the potential of other asset classes and diversify your portfolio.
GOLD: Gold remains the best hedge against inflation. This is reinstated by the fact that once the US removed the gold peg for the US dollar in 1933, average annual inflation in the US doubled in the next two decades. Gold is also attractive in times of crisis. However, the bull-run in gold seems to be poised for a breather in the near term, amid fears that a global economic slowdown will lower consumption and hence demand. Given the ongoing crisis, one should remain neutral on Gold and continue to hold it in his/her portfolio, till the time uncertainty gives way to clarity.
As regards investing in Gold, other than the tedious exercise of buying physical gold and storing it, one should either invest in Gold ETFs, which track actual gold prices, or invest in Gold Mutual Funds that invest in shares and securities of gold mining companies.
EQUITY: Post the recent which was almost 30%, fall, this is attractive considering that earnings of Sensex companies are likely to grow at about 18-20% p.a. over the next 1-2 years. Large cap blue chip stocks, which were hitherto too costly, are now trading at extremely attractive valuations, some of them having come down by 40-50%.This is the right time to buy such stocks and keep them in your portfolio. Invest in large cap stocks, stocks with a long performance history, industry leaders, etc as these are likely to lead once the markets bottom out. Reliance, ITC, HDFC, etc. are good options as they are much cheaper now than they were about three months back. This is the right lime to buy. So go ahead and add some equity to your portfolio.