Stay the course as volatility surges

It's the possibility that keeps us going, not the guarantee. The same applies to the stock market as well.

Market volatility and scepticism has been on the rise since the last couple of weeks were significant features have been the rupee depreciation, rising bond yields and an increase in the crude prices.

The local currency has depreciated by 7.5% in the past three months. The country is 81% dependent on imports to meet its oil needs. If the rupee continues to depreciate, it may propel the central bank to increase the interest rates.

Though the fall in the rupee will aid exports, there will still be some losers. The interest costs will move up for businesses that have borrowed from overseas and do not have adequate foreign currency earnings to service their debt.

Investors habitually turn bullish on stocks of exporters when the local currency depreciates. However, one important aspect to note is there may be some short-term gains, but unless there is a continual slide in the rupee, gains won't last beyond three to four quarters. The more critical point to watch is whether the export-oriented businesses which derive some benefit from this phenomenon actually are growing at a handsome pace or not.

While the benchmark indices hit multiple records in August, gains have been uneven and lopsided in favour of a few stocks. Domestic money and sentiment towards equity as an asset class have been the key drivers of this rally. The persistent buying by equity mutual funds has consistently provided a cushion against foreign outflows. Domestic funds bought $10.8 billion of stocks this year, offsetting $283 million of withdrawals by the foreign institutional investors.

Too many moving parts including the state elections in another three months' time will surely induce volatility into the proceedings. It is important to realign the portfolios and get out of duds and be with fundamentally sound & robust businesses which can tide over difficult cycles.

It is important to stay the course as volatility scares enough people out of the market to generate superior returns for those who stay in.

The writer is head of equity advisory, Centrum Wealth Management