In my June, 2018 & Oct’2018 articles titled Tough & Testing times ahead – QE se QT tak dated 28-Jun-18 and Q(e) se Q(t) tak-continuation dated 11-Oct-2018, I had mentioned what is quantitative easing and quantitative tightening and how it impacts the economies across the globe.
I had also mentioned the status on Quantitative tightening by US Government and its possible impact on emerging markets like India.
It has been nine months now from the date of those articles. I thought that it will be good if we review the developments since then. This is what has happened since June:
|Jun’18||Oct’18||Feb’19 (till 25th Feb)|
|NSE Midcap 100 Index||18,181||16,277||16,601|
|NSE Smallcap 100 Index||7,496||5,989||5,923|
|US – S&P 500 index||2,716||2,785||2,796|
|US – Nasdaq index||7,503||7,422||7,554|
|Crude Oil ($ per bbl)||79.44||82.14||55.45|
|Indian 10 year G Sec yield||7.90%||8.01%||7.58%|
|US Treasury 10 year G Sec yield||2.86%||3.16%||2.65%|
|FIIs flow in Indian Equity Markets (From 1stJune till 26th Feb)||(-)21505 Crs|
|FII Flows in Indian Debt Markets (From 1stJune till 26th Feb)||(-) 21399 Crs|
What does this data talk about?
If you look at overall picture, markets were weakening for few months, particularly in India and then started to rebound. However there is sharp volatility in the markets. In US, the interest rates, as represented by US 10 Year Gov. Security yields has gone up from 2.86% to 3.16% initially and now they are coming back to its previous levels.
Indian Equity Markets, Debt Markets as well as Currency markets have witnessed significant corrections. Small & Midcap indices have taken hit in this correction.
FIIs are selling from emerging markets and we are part of that selling spree.
Quantitative tightening is one of the main reasons of these market reactions. Trade war between US and China and pressure tactics of US on other countries are also adding to the market weakness. In recent past, we have been hearing from US Fed, on stopping the quantitative tightening soon and if this happens, it is a good sign for emerging markets such as India.
Along with these issues, the liquidity challenges in India for the NBFC sectors is making it more nervous. Also few more reasons for such volatility is upcoming elections and the recent attack on CRPF in J&K, subsequent surgical strike by India.
Now the dilemma for investors like us is what’s the future of our investments?
Few points to reiterate before we try to understand what is the future.
- RBI and Central Government are always well aware of the challenges and they keep intervening and take corrective actions.
- The trade war between countries / liquidity challenges eventually has to settle with time.
- If you observe these 9 months, we had numerous news and data points justifying the reasons for fall / rise of the markets. This correction / rise / fall is never predictable.
Now answering what will happen to our investments and what is the future ahead for us?
- We will have to go through the turbulent weather i.e, volatility, hence be cautious with your spending patterns, improve your saving capacity as much as possible.
- Try to maximise the returns by investing in volatile times. Please recollect the famous quote by Warren Buffett “ Be fearful when others are greedy, Be greedy when others are fearful”. Make use of these opportunities coming your way from time to time by investing via SIP (systematic investment plan) mode.
- Continue the asset allocation plan unless the goals have changed.
- Returns on equity markets eventually depend on what stocks (businesses) you own and not on how markets react in the short term, hence do not write off any particular asset class on the basis of near term volatility. However point to note is in such turbulent phases most likely the returns will be very low or your time horizon to stay invested may increase. Hence be ready for it.
- If you have any adhoc investments to be made other than the pre-determined asset allocation plan, stay in Liquid funds for time being and shift to equities over a period of 9-12 months.
- Keep reminding yourself that equity investments are meant for long term i.e beyond 5 years at-least. Any goal which is within these 5 years, invest in safe instruments.
Please do consult your financial advisor, before your fear drives you to react and take decisions on your investments.
Remember, this is a turbulent phase for all of us with respect to our investments, the only way to handle this phase is to stay calm, continue with the asset allocation plan and keep sufficient emergency fund to handle any unexpected expense.
This below data point is to help you overcome your fears when facing such volatility and helps you stick to your asset allocation.
This is an example showing 1 lakh each invested in Sensex, two Equity Mutual Funds of reputed fund houses of India on 01-Jan-2005 and stayed invested till 31-Dec-2018, which is 14 years. These numbers are actual valuations on the basis of NAV / Sensex. These 14 years have seen many volatile phases, yet the investments have made decent returns.
|Amount Invested on 01-Jan-05||Value as on 31-Dec-18||CAGR|
|Mutual Fund – Equity Fund 1||1,00,000||10,75,781||18%|
|Mutual Fund – Equity Fund 2||1,00,000||8,84,056||17%|
Happy & Safe Investing !!!