A new era

Globalization means the age of prolonged bull and bear runs is nearly over as different markets cope with unique challenges

By  Mohan Sule

Investors fear volatility. It makes them risk-averse. Many prefer to stay on the sidelines till the market calms down. It is drilled into their psyche that the patch of turbulence is temporary. Contributing factors ranging from political instability, disturbances, liquidity crunch to weather fluctuations are enumerated. Indeed some of the causes are of short duration and are resolved rapidly. A few might have the tendency to fester indefinitely or erupt frequently. The unpredictable scenario puts off a large chunk of investors from equities. Some tiptoe occasionally to test the waters and scurry back to the safety of fixed income instruments on getting burned. Most keep waiting for the market to stabilize to form an opinion. Of late, however, there is a reckoning that the turmoil is likely to be a recurring feature rather than once-in-a-while phenomenon. The inter-linking of markets has magnified the impact of developments in some corner of the globe on trading worldwide. Mapping of scheduled events for their ramifications on investment pattern is turning to be an academic exercise rather than an attempt to maximize profit or restrict losses. A recent illustration of the diminishing returns of projections was the anticipation of market movements on the expected hike in US Federal Reserve’s discount rate. Contrary to the general belief, markets rose rather than nosedive after the central bank increased rates 0.25% after more than a decade. Those who withdrew or held back expecting more correction were disappointed.

If a predictable occurrence led to so much hand-wringing, then the continuing suspense over the course of direction of the market might break down traditional methods of making investment decisions. Stability in policies, taxation and laws are attractive pivots for investors. The after-effects of the havoc created in the market a few years ago when then Union Finance Minister Pranab Mukherjee levied retrospective capital gains tax on overseas transactions of assets in India are still recalled and felt. Companies consistent in their dividend payouts are preferred.The importance can be gauged by the recent directive of the market regulator to issuers to disclose their dividend policies. Those utilizing funds for purpose other than stated in the prospectus have to offer exit option to investors. So far it was understood that exporters’ fortunes are tied to the health of the importing countries. Now there is a reckoning that even executive actions can have a bearing. Shares of tech companies took a hit when the US government announced hike in H-1B visa fees from 2016. On the other side, the export tax slapped by the Indonesian government on coal blunted to some extend the cost-effectiveness of importing the commodity to tide over local shortage. The restrictions imposed by the Supreme Court and the Delhi government on vehicular movement in the capital hurt shares of makers of big vehicles.

The biggest puzzle is why plunging commodity prices are not lifting economies of the emerging markets. India’s growth seems to have flattened and that of China’s slowed down. The slump in demand for oil and metals has resulted in supply glut, keeping prices down and, in turn, pulling down the economies of the producers. Investment in shale gas, a shining star till recently, has proved to be non-starter. The irony is that most of the emerging markets look at the commodity producers as important markets for their goods and services. The Gulf is a major source of remittances and buyer of Indian merchandise and projects. The global economy, therefore, seems to be trapped in a vicious cycle. Countries exporting natural resources want consumption to increase to stay buoyant. The increase in appetite of the users is supported by debt and leads to asset bubbles and eventually a bust. Thus, the calculation of investors hoping for oil-based industries getting a boost has gone off the mark. Similarly, some of the blue chips from legacy conglomerates have underperformed as they have had to commit significant resources to succeed in the auctions for natural resources, leaving them cash-strapped to undertake capital expenditure. Those basing their investment calls on longevity of an enterprise as well as enthusiastically backing emerging sectors that have proved to be capital guzzlers might have had to cut their losses. Not surprisingly, bets on entities based on their geographical presence are proving to be costly after the emergence of low-asset model e-commerce start-ups. The sudden transformation in the outlook of different regions is turning equities choppy. Investors will have to brace for the market to change moods often and unexpectedly. The solace will be the ease of entry and exit for those with opposing views.