Some Respite In Sight. But, Do Not Get Ecstatic

The relentless slide of the markets finally came to a halt yesterday. For a market perplexed by the negativity spread due to various factors, percentage or number of points by which they rose hardly mattered. The past fortnight has seen the markets move from beginning with anxiety over anticipated action from central bankers in India and the US to depression following unexpected moves from both as well as some poor economic data points emerging from other geographies, typically China.

Market sentiment can drastically change from one end to the other in a matter of a single day. A fortnight is actually too long a period for investors to not realize it. The US announcing an additional taper to the extent of another USD 10 billion did global markets in. To add to that was the Chinese manufacturing data which suggested a clear slowdown in the world’s fastest growing economy. These two factors put together were enough for spooking the markets.  The flight to quality syndrome that hit the dollar in the early part of the past fortnight continues till date.

There is only a glimmer of hope that the situation will improve sizeable going forward. As far as the domestic scene is concerned, it remains highly dependent on the political thought process than anything else. If you look at the current situation on that front, the populism bug seems to have bitten those in power. Freebies are being doled out in numbers as a part of the vote bank politics. The Finance Minister has gone on record to project how financially well prepared we are to tackle the deficit problem. That surely sounds good. According to the various assurances that we have had, India was also well prepared to handle any additional taper. What happened in the wake of the second taper announcement is already here for all to see. Preparedness seems to be a state of mind and a plan on paper. The reality is far from what seems is projected.

The contagion effect of a selloff following disappointing manufacturing data that brought back fears of a slowdown in the economy was finally arrested yesterday. That takes me back to pointing toward something that I have been saying even before. US lawmakers say, the economy is improving and hence the taper of the bond buying and so the markets go down under. Suddenly there are indications that manufacturing is slowing and hence the economy seems to be heading for a slowdown and again the markets crash. What needs to be understood from this paradigm is, the market is this way by its very nature. It will always try and find reasons to go either ways. The long term improvement or deterioration in factors is what sets a trend. It is important to recognize this fact before reacting to short term turns which most investors fail to do. The end result is a massive wealth erosion like the one we witnessed over the past fortnight.

Coming back to what the markets did yesterday, in the US, the S&P 500 closed up 0.8%, while the Dow closed 0.05% higher at 15445.24. European stocks too followed their US counterparts closely to lift themselves up in the closing session and helping benchmark indices close in the green. Asian markets are witnessing a sharp bounce back today after having faced some very tough times over the past week or so. Except for China and Taiwan all other markets are faring well this morning. The Shanghai Composite is currently trading down 0.82% while the Taiwan Weighted is down by a massive 2% this morning. Japan has seen the sharpest improvement this morning with the Nikkei trading 1.25% above its preceding close. Indonesia, Korea, Singapore and Malaysia too are doing well at least until now with benchmark indices rising an average 0.70% so far.

Indian markets are expected to begin the day from where they closed yesterday. Overall global cues suggest a milder day for the markets today. The SGX Nifty is currently trading down 16 points but that should not be a conclusive factor for deciding the starting point of our markets. You could see a mildly positive start and the markets continue with a flattish bias for the rest of the day. Continuing to take cues from their global peers and of course the remainder of the corporate results, volatility should nevertheless remain the way it has been so far in the week.