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Time correction in physical and financial assets

LiveMint logoLiveMint 21-06-2017 Lisa Pallavi Barbora

As benchmark indices move higher, there is rising concern that a sharp correction could follow, given the current high valuations. Technically, a correction is defined as prices falling up to 10% of the value of an asset. And if the prices fall below 20%, it is termed as a crash. However, a fall in prices is not the only form of correction that can take place in the market. There also exists a concept called time correction. This can delay the gains that you may have been waiting for. 

Unlike the phenomenon of fall in prices—which is clearly understood as a correction—when a time correction takes place, you may not see prices falling sharply at all. Rather, the prices tend to remain around the same level over a period of time, moving up or down in a narrow range. This kind of sideways movement in prices, which is neither too positive nor too negative, is referred to as a time correction. For example, in the 5-month period between November 2013 and March 2014, the benchmark equity index Nifty 50 moved in a very narrow range of around 5%. However, seen from a point-to-point perspective, its absolute level remained around 6,300 points. 

It is difficult to manage a time correction as the price doesn’t show a definite trend. This becomes a greater worry if valuations are on the higher side or the time correction is preceded by a sharp rise in price. In the absence of significant news or actions, sometimes, instead of falling, the prices could remain around the same level.

For example, consider the Reliance Industries Ltd’s stock price; barring a short 6-month period in 2012. The stock price remained in a narrow band for around 8 years from June 2008 till February 2017. In such situations, it is hard to choose between selling or holding on to the stock.

From February 2017 till June 2017, the stock has returned around 40%. But one can never tell beforehand how long a time correction will continue. When asset prices remain stagnated over a period of time, the real returns become negative because of the impact of inflation.

While this phenomenon is easy to identify in listed and quoted financial assets, even physical assets like real estate can undergo a time correction.

The domestic real estate sector has been witnessing a sideways time correction over the last few years. Even though in some markets the prices haven’t corrected or crashed, demand has dried up at current prices, which represents a time correction. 

This kind of sideways movement in price becomes even harder to manage if you have borrowed to invest in the asset, which is the case with a large number of domestic residential real estate purchases. 

If the time correction in an asset carries on too long, you may be forced to accept a lower price to service the loan. While real estate loans are long term and hence can be managed better, leverage taken in stock markets is usually for a few days or weeks and in the event of a prolonged time correction one can stand to lose out as the borrowed money needs to be repaid.

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