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GameStop bubble will burst, but there is a bigger risk for Indian investors: Viraj Nanda of Globalise

For those in India, the risk is even higher. Per the RBI’s guidelines on LRS, buying options is not on the list of permitted capital account transactions.

January 29, 2021 / 09:08 AM IST
Image: Reuters

Image: Reuters

Viraj Nanda

Over the past few weeks, a battle has been brewing. A David vs Goliath battle with the underdog taking on the incumbent; the kind of battle that everyone loves to watch.

However, the location of this has been somewhat unusual: the US financial markets. At the centre of this battle is a company called GameStop.

GameStop came into prominence as an investment opportunity when Michael Burry, best known for his bet against the mortgage securities before the 2008 financial crisis, reported that he held a stake in GameStop and was bullish on its future.

But, the dramatic spike in share price started when Reddit forum WallStreetBets started posting about heavy short positions that institutional investors held, bringing it to the attention of a large audience.

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Retail investors started heavily buying into the company, hoping to profit from a short squeeze. This social media-driven interest coupled with increased demand from institutions trying to protect their downside has seen the share price of GameStop soar.

As of January 27, GameStop shares are up a staggering 1,914.55 percent since the beginning of the year.

However, the question remains: how will this end?

As of now, the situation is still evolving. Trading platforms like Robinhood and Interactive Brokers have restricted trading on GameStop and other such heavily shorted companies that have seen increased trading activity.

The US SEC is actively assessing the situation and regulators could restrict trading, leading to people left holding their positions for longer than planned.

As with all bubbles, this too will eventually burst and those left holding the shares will suffer.

For those in India, the risk is even higher. As per RBI’s guidelines on the Liberalised Remittance Scheme, buying options is not on the list of permitted capital account transactions. This would mean that those wanting to participate would need to build cash positions, and expose themselves to unhedged downside risks and bigger financial losses if the share price was to reduce.

For the long-term investor, it is important to tune out the noise and focus on building a well-balanced portfolio for the long term.

GameStop is a tiny fraction of the US market, and this will not have any impact on broader market movements. It is important that long-term investors stay disciplined, and seek to build a portfolio through appropriate asset allocation and diversification.

There is little doubt that social media can significantly influence consumer behaviour, and we have seen how this extends to investing as well.

Now that information can be shared so freely and at such scale, it is easy for people to influence others thinking and create more such events in the future.

It will, therefore, be very interesting to watch how this saga unfolds, and how the relationship between social media, the financial markets and the regulators will evolve.

(The author is CEO of Globalise)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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