The economic slowdown in India is for real and not just suggested by statistical data. The evidence of slowdown is noticeable. Conversations with friends suggest that their businesses are not doing well or the workplace atmosphere is stressed as targets seem overstretched.
Shopping is easier with less crowding. Some malls are turning into ghost spaces with shops shutting down, flights are sometimes half full, unfinished construction blights many a skyline. These other such anecdotal bits of evidence are clear signs of a slowing economy. Statistical data too suggests slowdown with downward GDP growth revisions, weak IIP (Index of Industrial Production) growth numbers and slower corporate sales and profit growth.
It is always better to buy when your own outlook on the economy is brighter than to buy with worries on what is going to happen tomorrow
Experts will tell you that the slowdown is the best time to invest in risk assets as valuations are down and risk asset classes such as equities will do well in the long run as the economy picks up its slack. It is true that equities can do well in the long run as the economy comes out of a slowdown, but it is also true that the means and the appetite to invest in risk assets is low. It is always better to be cautious on investments if you are directly or even indirectly affected by an economic slowdown.
You will do well to respect the slowdown when you are thinking about investments. The first rule in a slowdown is to avoid leverage, i.e. you should not borrow beyond your means and also should not run a portfolio that consists of companies that have high debt on their books. The slowdown can be prolonged and as the length of the economic slowdown increases the ability to service debts by both individuals and corporates decreases.
Hence, if you are affected by a slowdown, stay away from investing in property (if you are taking a loan) and stay away from stocks of companies that are leveraged.
Slowdown will also create fear. The fear could be for your future job prospects, the expected future value of your current investments or for your ability to continue to service your loans on property, vehicle, etc. It is best to recognise this fear and act on it. If you are worried for your job, you should work harder or learn new skills. If the worry is on the future value of your investments, it is best to sell the investments for safer assets, and if the worry is on servicing loans, it is best to reduce the loans by using all available liquidity.
The primary aim for you in an environment of economic slowdown will be to protect your interests. There is nothing to lose by being cautious on investments in a slowdown while there could be a lot to lose if you are too adventurous but not prepared for the rough ride ahead.
Markets behave strangely and may seem to buck the slowdown by steadily rising higher. FIIs may also behave contrary to expectations and will be investing despite slowdown scenarios. The Nifty and Sensex are higher by 15 percent in the calendar year to date while FIIs have bought Indian equities and bonds worth over $12.5 billion. You should not get carried away by such market behaviour and should instead invest with your future prospects in mind.
It is always better to buy when your own outlook on the economy is brighter than to buy with worries on what is going to happen tomorrow. You will not miss out much even if the Sensex rises another 10-15 percent from here but where you will gain is that you will have much more confidence to invest even at higher levels when your own future looks brighter.
Let the market go where it wants to go while you think about yourself first when signs of economic slowdown are strong.
Arjun Parthasarathy is the Editor of? www.investorsareidiots.com, a web site for investors.
Source: http://www.firstpost.com/investing/be-selfish-now-avoid-borrowing-and-leveraged-stocks-427733.html
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