A factory shutdown, a policy shift, or a sudden change in commodity supply thousands of kilometres away can affect the price of an Indian share within hours. This connectedness is one of the defining features of modern investing. Observing the Global Market helps investors understand why domestic prices sometimes move without any local news. Early trading in SGX Nifty often shows the first reaction to such events. Learning how these shocks travel can help you respond with reason instead of reflex.
The Transmission Channels
Shocks get delivered to India through multiple channels. First is capital flows – whenever international investors get jittery, they tend to cut risk exposures irrespective of whether their domestic markets are stable or not. Second, through trade – a downshift in demand for the country’s exports translates into reduced revenues for exporters. Third, through commodities – India is a net importer of crude oil, edible oils, metals and fertilisers, and any change in prices impacts both inflation and corporate margins. Fourth, through sentiment – market psychology is quick to catch fire through social media. Even if there is no fundamental impact, the fear of one can lead to selloffs. Understanding which channel is the vector for an event is important, so we know how long-term and deep its impact can be
Lessons From Past Episodes
India has seen several episodes of external shock and stress – from crises in the financial systems of other countries to pandemics and large swings in commodity prices. During these episodes, markets tend to get severely shaken up and sell off massively in the initial stages – fear drives large amounts of money out of the system. Then, as panic recedes, stability returns, sometimes faster than one would expect, and early sellers regret their decision. It is usually the most disciplined long-term investors who benefit the most from such situations as they continue to buy during periods of uncertainty at discounted prices. That said, this does not always happen – no rule applies to human nature. But one thing is certain – being rattled by events beyond one’s control rarely ends well.
India’s Buffers
The Indian economy has several buffers that protect it from external shocks. The first is large forex reserves that cushion the blow of any currency-related stress. While the country has a large domestic consumption base, it is smaller on the export front than some of its peers. However, a steady stream of regular investments via monthly systematic investment plans ensures there is adequate purchasing power from the domestic front. Banks are also stronger than they were a decade ago – higher capitalisation and lower stressed assets. Combined with better regulation, it brings greater stability to the system.
How Investors Should Respond
When something happens that shakes up markets, the first thing for an investor to do is understand if it actually impacts their investment. If one has, say, a domestic consumption-focused stock and the event is about a supply chain disruption in technology, the impact is going to be limited. But if one has an exporter-oriented company and the event is about a trade embargo in that region, the impact can be significant. It is important to analyse events objectively without getting swayed by the panic around it. That usually takes longer than one might think; do not take any major calls in the first few hours. See what the actual impact is going to be and assess if one’s time horizon and risk appetite is suitable to hold on through any selloff. If one needs the money in the next year or two, it should not be invested in equities anyway. Similarly, if one has a decade-long horizon, a temporary setback is of little concern. It is important to leave some dry powder at all times to take advantage of temporary corrections should one find any. But one should also not deploy everything at once, as there is no clarity on bottoms.
Building a Robust Portfolio
The best way to deal with uncertainty is diversification. Spread investments across asset classes and within equities, have a mix of large caps with strong balance sheets and some smaller mid-caps that one can believe in. Do not put all eggs in one basket – or one sector or theme, for that matter. It is important to invest in oneself as well – building skills, developing savings habits and adequate insurance coverage ensure one’s personal situation is strong enough to withstand any financial shocks. Regular reviews and rebalancing of one’s portfolio are important too.
The world will continue to throw surprises at us. Those best prepared to deal with them are those who not only understand their nature, but also have the tools and mindset to take advantage of the chaos.
