Harnessing market volatility to your advantage

On the local front,Indias short term growth dynamics are coming under pressure due to crude price hikes,stubborn inflation,rising interest rates,low credit off-take,fiscal deficit concerns and government policy impasse . The huge increase in G Sec yields is indicative of a tight monetary environment which presents another area of concern.

However,amidst the above scenarios of scepticism,positives continue to exist. On the global front,the scenario in US has improved significantly. The economic data coming out of US in the last one-month like GDP numbers has been encouraging,but is being ignored due to the ongoing focus on the Euro-zone crisis. In the domestic context,monsoons have been above expectation thereby expected to have a positive impact on food price inflation. Inflation due to base effect is also expected to improve significantly over the next six months. However,the government has to find a credible anti-inflationary solution while ensuring lower long term interest rates. This can only be achieved through alternative government measures like efficient taxation and efforts towards reducing its subsidy burden. Hence,a scenario of reduced inflation supported by the good monsoons coupled with lower long term interest rates and the reduction in G Sec Yields has the potential to trigger a sustainable rally.

How the above global and domestic events pan-out will provide short term directional roadmap for the Indian equity markets.

While it is difficult to pre-empt how the European crisis and domestic worries culminate,the obvious constant emerging out of the scenario is volatility. Kenneth Rogoff and Carmen Reinhart in their study of seven centuries of financial history noted that the period after a significant financial crisis is always marked by extreme volatility.

In such a scenario,the pertinent question in the mind of every investor continues to be Is this the right time to invest in equity? The answer is a resounding Yes!. Not withstanding short term blips,equity continues to remain the only asset class with the potential to provide inflation adjusted long term returns. In the current context,investors need to provide for greater volatility in their equity strategy. Rather than being wary of volatility,investors need to capitalise on this to increase return potential.

The Indian equity markets today continue to face a dichotomy of valuations whereby there are stocks that are trading at very high valuations and vice versa. Hence out-performance is expected to come from stock picking. In such a scenario of expected volatility and pockets of valuation attractiveness,investors are set to benefit from investing in flexi cap dynamic funds and value investment oriented funds which have the ability to straddle across market caps / sectors and asset classes.

Fundamentally,the Indian economy is well positioned and continues to be one of the favourable investment destinations of the world. The Indian pillars of growth are strong. For example demographics like the favourable working age ratio,a large young population,high savings rate of 33.7 per cent in FY 10 and an economy propelled by a strong domestic consumption story. Indias growth therefore is not susceptible to withdrawal of stimulus package unlike western world. Indian investors need to maintain their allocation to Indian equity through the common three mantras of SIP,STP and asset allocation that will help them continue adding value to their portfolio this festive season.

The author is Nimesh Shah,MD,ICICI Prudential AMC