Current volatility in stocks is an opportunity for bulls

Tushar Pradhan HSBC Global Asset Management

What a difference a 1000 point drop makes in the stock markets! It is unbelievable that the sentiment can change so dramatically in such a few days. But in a bizarre fashion Mr. Market has shown the true nature of his neurotic personality. From extreme optimism (markets will continue to post all-time highs) the participants have become quite depressed about the current nature of the market. It may be interesting to know the reasons for the current environment.

What has changed?For starters, what looked like a sharp drop in oil prices has become a free fall. With it global risks pertaining to this impact are becoming evident. While India celebrated the drop in oil prices as a significant portion of its imports are crude oil, Russia and Brazil -significant producers of the commodity - came under severe pressure. Russia’s currency has depreciated dramatically in the past few months and the most recent cause for global markets to fall has been that this fall has been as much as 25% in the past few days.

Why is this a worry for global markets?Russia is a large oil exporter and critically linked to the global economy as a major supplier. In a bid to stop the steep decline in its currency the country’s Central Bank raised rates to 17% from 10.5%, the 6th increase in less than a year. This is an extreme change leading to a drop in markets across the globe. Investors may scale back allocations in riskier assets as the divergence in valuations versus the outlook on growth starts to become quite glaring. A slowdown led by falling demand for commodities pushes profits down and consequently valuations suddenly seem rich. Stock markets across the world have had a very significant run this year and investors may be tempted to take profits and put away some by the end of the year as a response to the current sharp fall in crude prices.