In his inaugural address as the US President in 1932, at the height of the Great Depression, Franklin Delano Roosevelt told his countrymen, “there is nothing to fear, but fear itself.” FDR was exhorting people to refrain from self-destructive fear. Fear can be, sometimes, self-fulfilling.
In India now, thanks to the social media, all sorts of rumours, fake news and disinformation are going viral. This kind of negative news and disinformation can do a lot of harm. I know of an investor who sold 90 percent of his portfolio of stocks and mutual funds fearing that a recession and market crash are imminent.
What is the reality? How should investors respond?
Let’s get the issue in perspective. There is no crisis in the global economy; but there is a slowdown. If the US-China trade skirmishes aggravate into a full-blown trade war, the global economy may slip into recession. If that happens, that would be part of the normal cyclical ups and downs in the economy. President Trump, though totally unpredictable, is unlikely to push the US economy into a recession since that will seriously jeopardize his chances of getting reelected in 2020. Trump, a master deal maker, is trying to extract maximum from the Chinese. Even if international trade and global economy is impacted, stock markets are unlikely to be hugely impacted since the consequent highly accommodative monetary policy will provide support to the markets.
Indian economy is in a slowdown, not recession
In India, there is no economic crisis. There is a growth slowdown, particularly in segments like autos. This slowdown is being addressed through many demand-stimulating measures announced by the FM recently. FMCG slowed down a bit in Q1, but most major companies had volume growth belying fears of a demand slump. The 4 rate cuts announced by the RBI so far this year will certainly help in stimulating demand. Monetary policy normally acts with a lag of 2 to 3 quarters. H2 GDP growth in India, aided by base effect, would be impressive. India is likely to end the year with a growth rate of around 6.5 %. It would be absurd to say that an economy growing at above 6 % is in recession.
Wanted: more confidence-building measures
It is a fact that business confidence has been seriously impacted and animal spirits have taken a big knock. Risk-aversion had gripped business. Policy mis-steps like the higher surcharge on FPIs, witch-hunting of bankers and harassment of businessmen by over-zealous bureaucrats and tax personnel have all contributed to the erosion of business confidence. This is being corrected now. Confidence restoring communication from the Prime Minister himself through his Independence Day Speech and now the stimulus package from the FM are reassuring and have changed the sentiments for the better. The economy needs more confidence building measures to encourage risk-taking and kindling of ‘animal spirits.’
Market will continue to be excessively volatile; stick to quality
We are living in a world in which a ‘Trump tweet’ can impact global markets. In this dynamic world of high uncertainty and market volatility investors should stick to quality. Even if the market turns bearish good quality stocks -both in the large-cap and mid-cap space- with earnings visibility will continue to be resilient. This market is just perfect for SIPs. Remain invested and continue to invest.
Posted on 28 August 2019