In my June, 2018 article titled Tough & Testing times ahead – QE se QT tak dated 28-Jun-18, I had mentioned what is quantitative easing and quantitative tightening and how it impacts the economies across the globe.
I had also mentioned the current status on Quantitative tightening by US Government and its possible impact on emerging markets like India.
It has been four months now from the date of that article. I thought that it will be good if we review the developments since then. This is what has happened since June:
|Oct’18 (till 11th)|
|NSE Midcap 100 Index||18,181||16,277|
|NSE Smallcap 100 Index||7,496||5,989|
|US – S&P 500 index||2,716||2,785|
|US – Nasdaq index||7,503||7,422|
|Crude Oil ($ per bbl)||79.44||82.14|
|Indian 10 year G Sec yield||7.90%||8.01%|
|US Treasury 10 year G Sec yield||2.86%||3.16%|
|FIIs flow in Indian Equity Markets (From 1stJune till 11th October)||
|FII Flows in Indian Debt Markets (From 1stJune till 11th October)||
(-) 24331 Crs
What does this data talk about?
If you look at overall picture, markets are weakening, particularly in India. In US, the interest rates, as represented by US 10 Year Gov. Security yields has gone up from 2.86% to 3.16%. This has happened because their Central bank, Federal Reserve, has increased interest rates last month and they have clearly communicated that they are going to increase it in future as well. They are also continuing with their Liquidity pull back program (Quantitative Tightening) as we had discussed in my previous article.
Indian Equity Markets, Debt Markets as well as Currency markets have witnessed significant fall. Small & Midcap indices have taken hit in this correction.
FIIs are selling from emerging markets and we are part of that selling spree. They are taking away this money because interest rates in their economies are rising.
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.
Along with these issues, the liquidity challenges in India for the NBFC sectors is making it more nervous.
Now the dilemma for investors like us is what’s the future of our investments?
Few points to note 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. So, current challenge of possible default by IL&FS may also be put to rest in few weeks or month(s) time.
- The trade war between countries also has to settle eventually.
- What will remain as a challenge is the quantitative tightening and the quantum is huge and unavoidable. As I mentioned in my last article, it all has started in 2014 and will continue for some more months to come. However this too shall pass and settle down with time.
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 wear seat belt and stay where ever you are. Which in short means, continue all your existing SIPs and investments and stay invested. Don’t do any panic selling.
- Continue the asset allocation 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. 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 before you decide on how long to stay invested and which asset class to choose.
Please do consult your financial advisor, before your fear drives you to react or take decisions on your investments.
Greed and Fear are the two emotions or biases that drive the financial markets, the one who takes them to their advantage create wealth and the one who succumbs to it lose their hard-earned money.
In these tough times, the only way to sail through is to stay calm and stay informed.