The SEC Chairman has resigned but the removal of credit restrictions is still to be announced. Meanwhile the Broker firms have to collect moneys due from clients on t+5 or force sell their unpaid for shares. So although the market staged a rally on the day the Brokers met the President , it could not be sustained.
The stock market is nearing bear market territory — or a downturn of over 25 %, that can last weeks, months or years. In any bear market, you have no idea when it will end or how bad it will get. So investors naturally get scared.
So when will the decline stop and the market turn upwards. International experience may be a guide although there is no rationale for our market to necessarily follow such patterns.
So when will the decline stop and the market turn upwards. International experience may be a guide although there is no rationale for our market to follow such patterns. On rare occasions, such as 2000-2002, the stock market dropped almost 50 percent. But the market recovered. In the average bear market, investors have gained back what they lost within about 2.5 years, according to the Leuthold Group, which has studied bear markets throughout stock market history. After the 2000-2002 crash, investors did not however recover what they lost until 2007.
So what should investors do? Withdraw from the market completely or continue to hold the fundamentally sound shares which may be overpriced still despite prices falling from their peak level by 25%. One way is to average down by buying shares which they hold at the lower prices now and thereby bring down their average cost.
The other way is to sell out those shares and move into cash or to the bond market until the market bottoms out. But there is uncertainty in the government bond market too since the Central Bank seems unable to keep down the market interest rates. As market interest rates rise bond and stock prices generally fall even more than the current levels. So the prudent investor must decide on fundamentals of the company as well as the fundamentals of the economy. Will the economic growth at the current 8% or so hold or will it come down. Generally inflation doesn’t seem to affect the stock prices in our country according to research by Professor Lalith Samarakoon. So investors have to consider only the growth prospects and the possible interest rate scenario.
The writer is an economist and is the General Manager of a Colombo based stock brokering firm. You can reach him via raja.senanayake712@gmail.com
http://www.news360.lk/markets/stock-market/how-should-investors-respond-to-the-current-market