The first serous correction of the current bull market has understandably shaken investors and market participants. At the outset let me allay fears being created regarding the termination of the bull market based on a single day crash. Bull markets are known to create panics and steep corrections. That is primarily the process by which stocks move out of weak hands and get consolidated with large, stronger players. In the previous big bull market of 2003 - 2007, the markets had about 3-4 serious corrections and two of them saw the indices fall more than 30% from the peak. However in both these major corrections of May 2004 and May 2006, the indices bounced back and went on to make new life time highs within 6 months of creating a panic bottom. Even the Bull Market of 1998-2000, popularly known as the Software Rally, had a 20% crash in October to November of 1999. To put things in perspective, we have after today's crash given up about 15% from the peak of 9100 Nifty Levels. It is highly unlikely that we will go all the way down to a 20% crash (Nifty level of 7100) or more, but at the same time given the serious mayhem happening in the Global Markets it cannot be ruled out. Important point is to keep your nerves calm and stay invested. You may not like to buy more till things stabilize but do keep your long term funds ready to be deployed as and when the volatility subsides. What makes me confident about the bull market continuing further? Well nobody has ever been accurate at predicting markets and my confidence in retrospect might look misplaced after a few months. However there are a number of indications suggesting that both the limited downside risk and the amazing upside potential are not only intact but are likely to get better once the global sell off abates. Bull markets usually peak off when the underlying Economic Fundamentals are very attractive and valuations are somewhere near their historic highs. Also retail participation is in frenzy with every second person on the street advising you on stocks. None of that has happened so far. Economic Recovery is still not visible, retail participation is mainly through mutual funds, leverage in the markets is not significant and valuations even at the recent peak were not astronomical. Downside risk is protected because domestic inflows are significant, economic fundamentals are likely to get a boost with Crude at $43 and commodity prices at multi year lows. Even with the most pessimistic growth forecasts we are the Safe Haven where global money should find its way considering a very comfortable fiscal and current account deficit, economy largely influenced by domestic consumption and benefits of low commodity prices yet to get factored in. Therefore while we are likely to continue getting butchered in the near term, keep calm and stay invested. To end on a funny thought - China never produces anything which lasts long so expect the panic manufactured by them to also fade out soon...
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