When panic rules investors , whats the way forward?

I think , the market today is in an opposite frame of mind — where every bit of news is bad news. It is surely a sign of the times when a sharp cut in interest rates by the central bank, breaking a four-year trend of rising rates, passes unnoticed by the stock market.

Rising interest rates have been a key risk factor for the earnings of Indian companies for a year now and were the key reason for the spate of earnings downgrades over the past year. But the market moves since then suggest that investors, weren’t looking at interest rates. Instead, they were probably glued to television sets trying to figure out the Dow’s next move!

Its clear to us that the debilitating damage caused to Indian stocks by FII pullouts drives home one point.Despite a large and resilient economy, bright growth potential, the market structure rests on a fragile edifice.

With the FIIs holding large amounts of floating stock in the listed companies and domestic institutions , market levels and valuations for Indian companies depend on the FIIs. Direct domestic participation in the stock market is high; in fact, large enough to match the transaction volumes of the FIIs on a daily basis.

But the high transaction volumes haven’t translated into any material or consistent buying in stocks over the past few months, suggesting that the bulk of the domestic participants are in for the short term.

For now, though, investors need to take note that indiscriminately selling quality businesses at today’s throwaway prices can inflict as much damage to your wealth, as did the uninformed buying at stratospheric Sensex levels.

Given the magnitude of losses that investor portfolios are likely to be carrying today, there is only one investment that can help you recoup some of this lost money and that is — stocks. Turning completely risk-averse and switching all your money into safe options such as debt or gold at this juncture could lock you out of any potential recovery in stocks even over the next year or two.