If something you thought was worth buying for Rs 100 is now suddenly worth Rs 94, would you still see value in buying it? Chances are that you would grab it before the offer ends? Alas, when it comes to stock markets you would do the reverse. You would over work your mind in believing that if there is a discount then it is not worth buying. You would run and even hide. As the screens were splashed in red on Black Monday of August 24, 2015, the same story played out. Yet again. Panic gripped the markets and the emotion of fear - one of the two emotions that drives stock markets - was in full force. The other emotion - greed - is forgotten for now. It ran its course for the past few years, as developed countries led by the US printed enough money to flood markets with liquidity or easy money looking for investment opportunities that would generate better returns for their investors. This pushed stock markets across emerging markets to record highs, India included. With the US Federal Reserve indicating a hike in interest rates sooner than later, the party had to end.
At the same time, the other economic giant, China, has been gripped with a slowdown. Over the past few weeks, its stock market has fallen like stones. Much sharper and more consistent than what we saw in the Indian stock market on Monday, when our broader indices shed close to 6 per cent. Attempts by the Chinese government to prop up share prices over the past few weeks failed miserably. It devalued its currency, and the latest numbers on its mercurial manufacturing capabilities, indicated a sharp fall. According to experts, this led to fears of even more devaluation by China to shore up its exports that have been the centerpiece of its economic success over the past two decades. The impact of this has sent shock waves across the world. The US markets have fallen sharply and so have European markets in addition to emerging markets. It is a contagion.
Now when a house is on fire, you really do not go and sit in the drawing room just because it is the best done up room in the house! You run out. Monday was a glimpse of that. When the emerging market basket no longer looks attractive to global investors, it does not matter whether India is the cleanest shirt in an otherwise dirty laundry. Markets move as much on sentiment as they do on fundamentals. The sentiment toward emerging markets has turned negative. And our stock markets cannot escape that reality, even though our economic fundamentals are way better than most others in the same basket. So yes, brace up for more turbulence in the coming days and weeks. When money moves, it moves fast.
In all the gloom, there is one good news. Over the past year, we have seen a big jump in domestic inflows into our stock markets. Having sat out for a better part of the journey of the Sensex to 30,000 points, retail investors have been pouring in money, largely when the index was in a band of 27,000-30,000 for a better part of this year. And if you were one of them, would you agree that if the markets were attractive to invest in at 27,000 can they not be attractive at 25,000 points? The other good news is most of the domestic inflows from retail investors have come through SIPs or Systematic Investment Plans that are meant for and work best, in volatility of the kind we are now seeing. It would therefore only be prudent to continue with them, because that would mean you are picking up more units for the same price. And when the markets do turn - which they will - you stand to make good gains. If you are a punter, then the extreme volatility may just make you lose your shirt if you haven't already on Monday. Picking stocks unless you are an expert is never a good idea and certainly not in times like these.
The big challenge, however, is what can the government do to mitigate the impact of the global sell-off? A lot more than just telling us: "All will be well soon"! It won't. It needs to step up reforms. While we may be the cleanest shirt - or at least one of the cleanest - there has been a disappointment among global investors. We shot ourselves in the foot over the MAT issue and hopefully that will be sorted out soon. But the big reforms are stalled. GST, labour reforms and the land acquisition laws remain nowhere in sight. The investment cycle is picking up, but rather slowly. Corporate earnings are unlikely to bounce back for another two to three quarters, say experts. This is the time to go even harder at reforms because it is easier to push through reforms in tough times. Investors need to see more action. They have bought into the talk and vision but now want to see that translating into action. They want to see a stable tax regime and no nasty surprises. We will need to work even harder now to attract global flows.
What the government does is not in your control. What you can do with your money, very much is. Try not to get distracted with all the noise around you. If you have SIPs make sure you keep them going. Engage with your financial planner to understand changes, if any, you may need to make to your portfolio. If you have never invested before, then again after consulting your financial planner, you may want to start an SIP. Make sure your portfolio is well balanced and is not dominant with any particular asset class. Like in life, never do anything in panic. It doesn't pay.