Dear Reader,
The main benchmarks Nifty and Sensex were down by 2.8 percent at 12.15 pm today while the prime instigator of the mayhem, the Nikkei, was down by around 14.2 percent, the Topix was down by 12.2 percent and Hang Seng by 2.2 percent. In US futures, Friday’s fall continues with Nasdaq futures down by 5.1 percent while the S&P 500 was down by 2.7 percent. In contrast, one could say the Indian markets are holding up rather well.
What really changed this week that stock markets are getting walloped? While there are some obvious reasons we can theorise about, there’s no real answer for why it happened now. It’s a bit like when at the beach you wade into the sea and it looks safe, but then the sandy slope dips sharply and makes it risky at that point.
One source of worry is the US market. Last week’s labour report invoked fears that the Fed may have fallen behind the curve in cutting rates, an issue analysed in great detail by my colleague Manas Chakravarty in the Pro Weekender newsletter. As he says, last week it became certain that a Fed rate cut was in the making after the FOMC meet concluded but one weak labour market report was enough to spook markets. Non-farm payroll addition came in at 114,000 jobs compared to the estimated 176,000.
For many months now, US economic data has blown hot and then cold, vexing those awaiting a rate cut. The Fed wanted to be convinced that the economy was indeed slowing down, to decide when to cut rates and not do it prematurely and then backtrack and lose credibility. One more blow to its credibility could be harmful. Post-COVID, the Fed was too slow to tighten in its belief that rising inflation was transitory, which then led to the current rate hike cycle. This time it could still stand accused of being too slow to cut rates. But that’s a failing it may consider a more acceptable one compared to doing it too soon.
However, this has brought alive the risk of recessionary conditions prevailing in the US economy. An ING note pointed out that the unemployment rate has risen to 4.3 percent, “triggering the “Sahm rule” in which a recession is indicated when the 3m moving average of the unemployment rate rises 0.5 per cent above the low of the previous 12 months.
This fear joined the BoJ’s tightening stance, causing the Nikkei to collapse into a bear market. The yen carry trade came into focus, a term that may invoke sighs from investors who were around in 1998 when it had unwound causing a crash in Asian markets and has done so a few more times since then. This term refers to investors who borrow in yen to take advantage of the low interest rates there and then invest it elsewhere and earn returns far in excess of the borrowing and even hedging cost. But when things go South as they do for various reasons this trade is unwound and causes capital outflows from the capital markets. Fears are that a repeat is possible.
But again, the BoJ has been tightening monetary policy for some time now so it should have been evident that this trade was at risk. The Bank of Japan raised interest rates in July to levels not seen in 15 years as the central bank acted on concerns that inflation was overshooting its target due to a weakening yen according to the meeting’s minutes, said a Reuters report. The yen has also been rising on the back of US labour market data, which has stoked recessionary worries, said the report.
How real are these fears? Writing in the FT’s Unhedged column, Robert Armstrong asks investors to breathe easy (free to read for Pro subscribers). He believes that the fears are overdone. He points to a few aspects about the July labour market data that could see it revert to mean in August. And there have been weaker readings in the past months too. Earnings in the June quarter have been strong too. Do read to know more. Also, read this FT pick about how fund managers are fretting as $1.5 trillion of cash has remained on the sidelines, assets that don’t earn fees for them. Investors are getting higher risk-free yields due to high interest rates.
While these are facts that can be analysed and then interpreted in many ways depending on your perspective, what retail investors should remember is that it’s very difficult to predict and be right about when a bear market or a bull market is going to take place. But in a bull market you suffer an opportunity loss if you have not invested at all or your portfolio gains even as your disbelief grows. You don’t lose in real terms. But in a bear market, if you have invested there is a risk of losing real money. So what should you do?
This decision is made difficult by the fact that the many times that you were warned in recent years, after disruptive events such as the pandemic, the Russia-Ukraine war, the Israel-Hamas war and the Red Sea crisis, the markets have simply bounced back. While that is indeed true, the advice in these times is also the same as in bull markets.
This is a good time to give your portfolio a close look, what’s the asset allocation between equity and debt, within equities how much is in high risk categories such as small or micro caps. For instance, themes that could not go wrong a few months ago, such as semiconductors or AI that led to a rally in US tech majors is now coming apart. Have you taken concentrated bets in sectors or themes where the gains are due many years down the line? When do you need to withdraw your portfolio and does your asset allocation and risk take that into account? If you need your money a year down the line, you should be thinking very differently about your decisions compared to someone who needs it ten years down the line.
Old-timers in markets may seem like wet blankets who want to keep you from attaining those supernormal returns on an expanding portfolio size that is bringing your financial freedom goals closer by the month. But the thing is when events such as the 1997-98 crisis happened, followed by the internet bubble bursting in 2000 and then a few more episodes that you will know if you read about the market’s history, many lost everything and were scarred enough to stay away from markets. When you see a stock trading in triple digits fall by 90 percent to double digits and then another 90 percent to single digits and then go into paise territory, it’s a memory that does not go away very soon.
That experience may have even seen many miss out on the run-up in equities that has created immense wealth for investors. The thing about creating wealth is also to preserve it so that compounding works in your favour. And yes, you may miss out on some gains in the near term but you will also ensure that you live to fight another day if a deep bear market takes root. So don’t blindly follow the ‘buy the dip’ chorus you may hear. Speak to your financial advisor and yes, do make sure the advisor has also seen a bear market in their lifetime or has at least studied it well to know what mistakes to avoid. And yes, if you are looking for places to park your money as valuations turn more attractive, do access our research team’s recommendations on stocks to invest in post-Budget 2024.
Investing insights from our research team
SBI Q1 FY25 – performance peaks, but risk-reward still favourable
Thermax: Stock running ahead of its earnings growth
Delhivery Q1: Steady show
Titan Company: Near-term margin hit; glowing long-term prospects
eMudhra: A good bet on paperless transformation
Dhanuka Agritech Q1 FY25: Another resilient quarter; outlook remains positive
SJS Enterprises Q1FY25: Exceptional results, strong growth catalysts ahead
Tracker
Monsoon Watch | Will better rains help tame food inflation?
What else are we reading?
Escalation in Middle East crisis adds to uncertainty on global trade front
Will Wayanad be a wake-up call for firm climate action?
Turmoil in Bangladesh may become a policy challenge for India
As CV sales stutter, is a downcycle imminent?
Chart of the Day | The message from global food inflation for the MPC
Sun Pharma: India remains bright spot amid uncertainty over hair loss drug
Wayanad — Mudslide along a slippery moral slope
Why India must regulate the marketing of ultra-processed foods
Is Japan ready for a ‘world with interest?’
Personal Finance
Nifty Alpha or Momentum: Which index captures market trends better?
Technical Picks: HDFC Bank, ONGC, Gold Bees and Clean Science
(These are published every trading day before markets open and can be read on the app)
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Ravi Ananthanarayanan
Moneycontrol Pro
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