Stay Calm - Don't Panic

Dear All

Lately the financial markets have been witnessing huge turmoil. While some of them are reasonable, there are others which are founded based on rumors. In any case, the inevitable reaction is panic

So what has really caused the panic button to be hit across the globe. What has prompted Gold to rally the fastest in a decade? What prompted China to cut its lending rates and reserve requirement? The one answer to the many questions is The US.

We are all aware of the subprime crisis that took toll of the US economy and almost pushed it to the brink of recession. Almost 7 months after the Bear Sterns fiasco, US had sufficient time to reassess its financial health. But seemed like complacency took over as was evident from Lehman going bankrupt. This was followed by the Merrill, the biggest US retail broker selling off to Bank Of America

Bombshells in the US are still waiting to explode – timing could be anyone’s guess. This seems to be one of the worst financial crisis since the Great Depression.

AIG’s assistance package announced by the US Fed was done with expectation of some calm to prevail in the market. But markets can behave irrational for periods longer than you could remain solvent. The Dow has plunged nearly 450 points yesterday to close at 10600 levels. With markets anticipating “the next AIG” the S&P 500 financial index fell almost 9% yesterday. Adding fuel to the fire is the US Housing market, which is at the epicenter of this financial turmoil. Housing data is pointing to further declines. Critical housing indicators would be watched by the Fed if financial markets continue to unravel as they have in coming days

What does an investor do in such markets???

Well that’s a million dollar question indeed. To quote the legendary Sir John Templeton – “ Bull markets are born in pessimism, grow on skepticism, mature on optimisim and die of euphoria”

Investors across asset classes continue to hinge on hope and await signs of recovery. Let me reiterate here that Indian markets are reacting to a global event – and INDIA IS NOT THE CAUSE OF SUCH AN EVENT. Hence one needs to have loads of patience in such markets.

Flight for safety is supreme in such market conditions and the same can be found in Liquid and Liquid Plus funds. FMPs are best suited in such market conditions as they help mitigate interest rate risks to a large extent

India has come out of such crises in the past like we saw in the case of the Asian Crisis. The regulators are vigilant and are actively monitoring the financial markets to ward off any ominous tendencies

On a final note – Be cautious and watchful of the markets – but panic is not the solution