Jehangir’s Jottings – 1: Markets always make new highs

Jehangir Tankariwalla



After successful stints in the private wealth businesses of HSBC and Anand Rathi, Jehangir set up his independent IFA practice a couple of years ago and today manages over Rs. 100 crs in MF assets from affluent families. There are no frantic calls from his clients worried about sinking markets, and his golf routine with key clients continues unaffected by the chaos in financial markets. A large part of this equanimity is due to Jehangir’s Jottings – the series of well-crafted communications he sends to his clients, helping them understand what to do and not to do with their financial investments. In the first of this series, Jehangir lucidly explains to his clients exactly what they should do in the current market situation. For all IFAs who are seeking the right messages to give to their clients to reassure them to stay the course, Jehangir’s Jottings can serve as a very useful guide.

Markets always make new highs

The last weekend brought a brief respite from days of correcting markets, and offered a timely opportunity to reflect on this.

The panic that seems to have spooked investors is largely on account of 3 factors;

  • A depreciating Rupee - which can be attributed to the following;
    • Flight of money from India to the USA, by Foreign Portfolio Investors (FPIs). With the rapid rise in interest rates in the USA, FPIs see an opportunity to park funds in risk free investments at reasonably high rates of return. FPIs are best viewed as fair weather friends, moving funds around the globe as investment opportunities present themselves. They will be back sooner or later, when the winds are blowing in our direction.
    • Increase in oil price - the bulk of India's oil imports is purchased in US dollars. The increase in global oil prices has led to a larger outflow of US Dollars from India's reserves.
  • The build-up of Non-Performing Assets (NPAs) over the last decade - Banks, and other institutions commonly known as the 'shadow banking sector' (largely referring to NBFCs) have not been prudent in their lending, and this has led to an increased level of defaults on their loans. This has been recently exacerbated by a huge organisation - IL&FS - having defaulted on some of their loan obligations. The government is cognisant of this issue and is working on a war footing to address this situation, having recently taken control of IL&FS and replaced its board.
  • The global trade war between USA and China - having largely resulted from the US President trying to appease his vote bank. This will be detrimental to both countries, and over time I see this trend reversing. India, while not totally insulated, is not likely to suffer a great deal from this, however every global issue is seen as a major influencer when negative sentiment rules.

As is always the case when markets correct, the clarion call is once again being sounded by the prophets of doom and gloom. A short while ago these very same prophets were flaunting India as the economy of the future, - highest GDP growth amongst large economies, youngest population, huge workforce, rapidly growing consumer numbers, growing purchasing power, fast developing infrastructure, etc etc. Has all this changed in a few months? Have companies stopped producing and making profits? Can a country striding ahead economically suddenly turn turtle and become irrelevant in the world? The answer is a resounding 'NO'.

What it does emphasise is that these self-styled pundits have no clue about future market movements, and the only way for them to stay relevant and earn their bonuses is by vacillating from euphoria to despair as the markets swing between north and south, the needles of their financial compass having come loose. They are best ignored - the fact of the matter is that they do not know any more than you and I do when it comes to how and when the markets will perform.

How do we negotiate the current situation?

The short answer is - like we've negotiated previous similar situations, with confidence in the future.

First and foremost, let’s take a few deep breaths and remind ourselves that we are investors, in this game for the long run. We have no immediate need for the money that we have invested and our daily requirements are taken care of, irrespective of what the markets do in the short term. There is absolutely no cause for panic.

Now, with a certain degree of calm restored, let's revisit the basic tenets of investment success;

  • What we are experiencing is volatility, not loss. It is the very nature of markets to be volatile, and the premium we receive (higher returns for investing in equities) is on account of this volatility. Look at it this way - if the price of equities never fell, they would be a sure bet even over the short term, and would return no more than debt investments do. So if you have spare funds that can be put away for at least 5 years, low points in these volatility cycles are wonderful opportunities to invest in equities. If you have already invested all that you have, put the TV remote away and watch a movie instead. Read the sports and entertainment pages of the newspaper. In short, ignore this temporary madness. We know that markets come back from every correction and eventually make new highs.
  • The world doesn't end. History tells us that mankind continues to progress, and there is no reason that this trend will reverse. With progress comes prosperity, and the best way to partake in this prosperity is to invest in it and stay invested in it.
  • Timing the markets is not possible over the long term. Some market timers get some of their calls right, and shout from the rooftops when this happens. But the more common "I made losses in the market and will never invest again" are classic examples of those who thought they were clever enough to time the market on a regular basis, i.e. sell when there is a correction, hoping to get back in when the market falls further. We agreed at the start of our investing journey that we would not be market timers, and we must stand resolute against the temptation of selling out when the sentiment turns negative.
  • Real wealth only comes from an increase in purchasing power, i.e. beating inflation. Investing in debt barely beats inflation, and is therefore not a viable alternative. Interest rates may rise from time to time, but inflation never fails to eat into this in the long run. Equity is the asset class that has historically returned a very healthy premium over inflation - 7% on average over the long term - and remains the best way to increase purchasing power. This premium will continue, and to reap this we need to stay invested in Equity.
  • Do not let ''this time is different'' worry you. It's never different - markets correct ever so often and always eventually make new highs. Never forget this. Even the 2008 market collapse - the worst in recent times - is testament to this. From a high of 6200 points in January 2008, the market collapsed to a low of 2600 points in March 2009. At the time, every market pundit predicted that it would take many years, possibly even a decade to recover from what they termed 'complete and utter devastation of the world's financial markets'. The market was back to 6100 levels in Oct 2010, a matter of just 18 months!
  • We have allocated our investments across asset classes in line with our long term financial goals. This will always remain the predominant determinant of investment portfolio performance. Timing the market, selection of one fund over the other, regularly churning the portfolio (getting out of a temporarily poorly performing fund to invest in what has been a recent strong performer), have relatively much smaller impact on how your investments perform.

To sum up, we are witnessing a period of high "volatility", and the correction that has taken place is a regular occurrence in the performance of equity markets. As long term investors, we understand why it is important to invest in Equities and equally, why it is crucial to stay invested in Equities through these corrections - to reap the long term reward that this brings.

I will continue to provide you with the reassurance that "it is never different - markets always recover and make new highs". Staying the course is what will make us successful investors and differentiate us from those who make the wrong decisions and lose out in the bargain. Please do not hesitate to call me for a chat when the TV and the newspapers try and convince you otherwise.

Best regards

Jehangir Tankariwala

Share this article