Equities, bonds and currencies reacted negatively to the US Federal Reserve’s statement on halting its bond purchases by the middle of 2014.
The negative reaction is short-term in nature. There is no case for a deep and long-term selloff.
A strong US economy is good for the world as a whole as it will help pull up many other economies that have deep linkages with the US.
The Sensex and Nifty are down by over 6.5% from highs, while the ten-year bond yield has risen by 25bps from lows over the last one month.
This is the time for you to build your portfolio.
Equity investors can look to build a portfolio of stocks with strong balance sheets and healthy growth prospects.
Index exchange traded funds are a good option as it delivers index returns at low costs.
Bond investors should invest in a mix of short- and long-term bond funds.
Short-term bond funds will benefit when the yield curve steepens on rate cuts and improved liquidity conditions while long term bond funds will benefit from a fall in the yield curve.
It is best to avoid commodity stocks and gold/silver given that the outlook for commodity prices are down on the back of paring down of bond purchases by the Fed.
The rupee is the worst hit by the Fed’s outlook on the US economy after having lost close to 11% against the dollar over the last couple of months.
The weakness, while negative for sentiment, is not as negative for equities and bonds.
An economy that is seen as steadily benefiting from growth in the US and from low inflation expectations will see good amount of portfolio flows coming in.
A weak rupee can, in fact, draw more flows on expectations of the rupee strengthening down the line.
Watch the rupee, but do not let it prevent you from building a strong portfolio.
ArjunParthasarathy is the editor of www.investorsareidiots.com a website for investors.
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