As the saying goes among smart investors, buy when there is blood on the streets! What we witnessed last week was the sharpest fall in Indian exchanges, ever.

We had arrived at that weak spot when markets were stretched on valuations and liquidity suddenly disappeared due to the mega IPOs. Hence there was little money to support the market on its fall. Global factors also played their role in this drama, bringing to the fore renewed concerns on a recession in the USA. Protagonists of the “decoupling” theory were suddenly nowhere to be seen, some having shamelessly shifted sides!

Investors need to bear in mind that there has not been any fundamental change in the country’s economy. It was a fact that we were trading at a high forward price earnings (PE), which made the market vulnerable to such falls. At current index levels, the forward PE for FY09 is around 18 which is fine, given the rate of growth being experienced by our economy. Hence investing at current levels gives the investor some room for growth over the next one or two years.

There are a whole set of investors who have been hurt by the recent fall. Largely, they have either invested with a short-term view, or with an idea of having a higher proportion of penny stocks or indulging in margin trading and derivatives. To short-term investors in equity, I would remind them that the certainty of gains in equities increases over time. The short-term is always too confusing and results in markets swinging either way, reducing the chances of gains. Plan your portfolio based on the time period available for the investment.

Then there are those who get carried away by the possibility of multiplying their investment overnight by buying penny stocks and mid-cap stocks. Their values would have plunged in some cases more than 50 per cent over the last week! If they have not liked this behaviour, my advice is to diversify into large cap stocks or funds. Do the switch in installments, rather than suddenly, allowing values to recover to some extent.

The worst-hit have been those who have been trading on futures and leveraged trading, as their losses would have been magnified many times. I find that most were not prepared for the losses. They should become better educated on how futures and derivatives impact their investment. Restrict investments of this type to the extent you can bear the loss.

Long-term investors can carry on with their investing through this turmoil, knowing that our economy is growing at a healthy rate of 8.5 per cent per annum. Indian companies by and large are more efficient than those in other emerging markets. Their return on capital employed ratios are far better and their rate of growth far higher, too.
Our economy is going to be propelled by the enormous spending on infrastructure, which is regardless of whether the US economy is in a recession or not. Given that the US is the world’s largest consumer of goods, any slowdown is bound to impact exporters and that will have some trickle down effect on other industries and consumption.

Having said that, we should remember that countries such as the US can be pretty fast on their feet when it comes to controlling inflation or avoiding a recession. Even though they are a large economy, they have the ability to weather storms and bounce back. So, keep your eye out on the future and continue investing for building your wealth.

(The writer is managing director, Hexagon Capital Advisors Pvt Ltd)