Here's why markets tanked after surgical strike across LOC

On September 29, 2016, following the Indian Army's strategic strikes against Pakistan sponsored terrorist hideouts, the Sensex fell 465 points to close at 27827. During the day, the fall had exceeded 500 points. This was indeed a reaction to concerns over what could happen – a fear psychosis-- the scare of not knowing what would happen. This resulted in many, fearing the worst attempting to encash their shares.

I am reminded of having read about an incident on June 18, 1815, when, at a little village in Belgium called Waterloo, a battle was fought between the British commanded by the Duke of Wellington and the French under Napoleon. At stake was control over Europe. As investors in London awaited news, they became more and more concerned as early news suggested a French victory. They waited for a sign. It was at this time the financier and investor Nathan Rothschild, who had invested heavily in the market, began to sell. Seeing this and believing that he knew the result (especially as he was known to have invested heavily believing that the British would win) everyone began selling. The London market collapsed. Secretly, in this collapsed market, the ones who were buying were agents of Rothschild as he had earlier received news of British victory, through a message relayed to him by a carrier pigeon. In short, he knew that Britain had won but as no one else knew he took advantage of their fears.

This illustrates a real truth – the best time to buy is when prices are depressed by pessimism or when there is anxiety or fear - "Buy when there is blood on the streets." The day to have bought was on September 29, 2016. And the time to purchase was in the two hours when the news of the strategic strikes trickled down. After that, the advantage was lost because with the time passing, world reaction was known and the matter started to settle down. True, there can be retaliation in a distant future but all things considered, it will not happen imminently. This was the belief in the markets too and though, the next day the markets did fall initially, it ended on a positive note – rising by 38.43 points to end at 27,866.

Meanwhile, the government has doubled the amount of Employees Provident Fund Organisation's exposure into the stock market from 5% to 10% and it is estimated that about Rs 13,000 crore will flow into the market as a consequence especially as interest on fixed deposit securities are abysmally low. Individuals too are moving from bank fixed deposits to shares as in the former interest rates are falling. Fixed deposit interest offered by banks is lower than the real rate of inflation presently resulting that the purchasing power of money in fixed deposits is falling.

Also, initial public offers (IPO) have become extremely popular after the market stabilised a year ago. In the first half of this financial year, there have been 56 IPOs that attracted a significant sum of Rs 17,283 crore into the market. And in the wings there are 16 companies planning to raise a further Rs. 5,745 crores. However, the ICICI Prudential Life issue which was oversubscribed many many times and in which the big bull Rakesh Jhunjhunwala purportedly invested Rs. 750 crores fell by 11% on its debut in the exchange.

It may, therefore, be prudent to wait and see before one invests in IPOs. An important factor one must bear in mind while looking at the market this week is the new RBI governor's maiden speech on October 4. Indications are that he is a 'Dove' focussed on growth as opposed to a 'Hawk' concerned on inflation. The general consensus is that though there may not be a rate cut before December , the governor will make a pro-growth statement which can spur the market in anticipation of a rate cut in December. This will happen as retail inflation did fall from 6.07% to 5.05% in August and this trend is likely to continue in the wake of good monsoons. In addition, infrastructure growth too grew in July by over 3% and GDP growth is expected to be over 7%.

This is a time to keep a hawkish eye on good stocks. There will be bargains, which can be taken advantage of.

The writer is managing director of Cortlandt Rand and an author