In times of a 'near' war, slowing economy, here's what you can do

As the US-Iran tension ebbed and flowed, the market reaction was dramatic. What should you do in such a panic situation? Make your hay!
The small- and mid-cap shares have underperformed due to the economic weakness and weak demand in rural and urban India.
The small- and mid-cap shares have underperformed due to the economic weakness and weak demand in rural and urban India.

War in the Gulf region nearly broke out. With action and retaliation between the United States and Iran, oil prices jumped. Meanwhile, India reported the worst quarter in economic growth in 11 years at 5 per cent. The nominal growth, which also includes inflation from the base year, stood at 7.5 per cent, perhaps the worst in 42 years.

The reaction in the stock market was dramatic. Benchmark indices fell across Asia. In the second half of the week, better sense prevailed, and an all-out conflict was avoided. Stock markets were quick to bounce back.

The weak economic growth data for India was a foregone conclusion. However, a persistent slow pace of economic growth has a cascading impact. In the previous instance when India’s growth slowed after the global financial crisis, the country’s finances were weak too. The government was spending more than it was earning as tax revenue by a wide margin. Fiscal deficit was at a record high, and the government had to borrow money from the market. Since the money supply is finite to curb inflation, the banking system had to make money available to the government as a priority. That led to private enterprises getting ‘crowded out’. It further slowed capital formation in the economy.   

In the present situation, despite the poor headline numbers, there are some green shoots. Government finances are weak but not as vulnerable as they were in 2011-12. Consumer price inflation is heading upwards and may keep interest rates where they are. However, prices are not running away. The rupee is stable too and has not had a sharp fall like it did in 2011-12. Foreign investors continue to bring in money in equity and debt markets. The cut in corporate tax is already likely to bring down tax rates for large businesses. In anticipation of that, share prices of leading companies that form a part of the S&P BSE Sensex and Nifty have gained ground. Over the past year, these indices have outperformed the broader market.

The small- and mid-cap shares have underperformed due to the economic weakness and weak demand in rural and urban India. The poor performance of these companies is more pronounced as the top 10 companies have jumped over 40 per cent. Typically, when large companies show that significant an outperformance, small- and mid-cap companies usually make a bounce back, which has been a historical trend, according to a note by Motilal Oswal Asset Management, a fund management firm.  

Oil shock unlikely

In a panic situation, like the one we witnessed last week, oil prices reacted immediately and jumped. India imports 80 per cent of the oil requirement and is vulnerable to any price shocks. Since logical steps to hold back fire were taken by both the US and Iran, a conflict was averted. Oil prices that rose initially cooled off. India has been assured of adequate supplies by significant oil-exporting nations, according to reports. Oil prices do not witness a runaway rally now like in the past. The US till now was the biggest consumer of oil. However, the new shale oil and gas discovery has made the US an exporter of oil and gas.

What can you do

If you have been following us each week, you may know things to do now. Volatility in financial markets should not be a reason for panic anymore. One should look at it as an opportunity. If there is panic in financial markets, investors tend to buy gold. A lot of investors bought gold in 2019. This column has always advocated ownership of financial assets. If you are a new investor, your best starter pack is an equity-linked savings scheme of a mutual fund. If you stay invested for 10-15 years in a systematic investment plan of an ELSS scheme, you will get equity-market linked returns and tax benefits. For more courageous ones, they could look at benefitting from any revival in small- and mid-cap stocks that have underperformed for a year.  

Seize your opportunity

Take the volatility in financial markets as an opportunity. If there is panic in financial markets, investors tend to buy gold. Also, own financial assets. If you are a new investor, start with an ELSS of a mutual fund. If you’re experienced, look at benefitting from any revival in small- and mid-cap stocks that have underperformed for a year In 2011-12, when India’s growth slowed after the global financial crisis, our finances were weak;now, there are some green shoots

(The author is editor-in-chief at www.moneyminute.in)

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