Moneycontrol Pro Panorama: Will the market bloodbath continue?

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?

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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?

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(These are published every trading day before markets open and can be read on the app) Event alert: The most definitive startup summit of the year is back! The Moneycontrol Startup Conclave on August 9 in Bengaluru will feature a mix of keynote speeches, panel discussions, and inspiring talks from experts in the fields of policy, artificial intelligence, venture capital, and entrepreneurship. Click here to register.

Ravi Ananthanarayanan
Moneycontrol Pro