Opinion
Shockwaves from Japan had a message for investors in India
Summary
- In an intricately interlinked world, retail investors found their assets hit by panic across oceans. A rate hike in Japan and a flap over jobs in America had combined to batter Tokyo’s stock market. It’s not an example of Chaos Theory, but a sharp reminder not to try timing the market.
When Indian equity investors wound up for the weekend last Friday, the path ahead seemed clear and bright. By the time they got back on Monday, though, the mood had darkened. Panic seemed to have taken hold, not just in India but around the world, leaving many in a scramble to identify what had hit their stocks.
Markets had tumbled across the world, with the strongest shockwaves coming from Japan, whose Nikkei index crashed more than 12%. In India, the S&P BSE Sensex ended nearly 3% down, while mid- and small-cap indices suffered bigger losses.
Market capitalization to the tune of ₹15 trillion was wiped out in a single day, even as the volatility index shot up 60%. Like Chaos Theory, at first it looked as if a little flap in the US over a fast-weakening jobs market—and hence recession risk—had triggered a market quake in Japan, with tremors felt everywhere else.
Also read: Mint Quick Edit | Manic Monday: From Bangladesh to markets
The web of causes and effects that shook stock indices, however, isn’t all that hard to explain. It serves as a reminder, all the same, that we inhabit a world that is far too financialized, interlinked and complex for us to track closely enough.
It’s a sign of the times that the hardest impact of US payroll data was on the other side of the globe. It was taken as a doom signal for the yen carry trade, which involves cheap loans taken in Japanese currency to invest in high-yielding assets elsewhere.
The Bank of Japan (BoJ) had just raised its policy rate to 0.25% after having held it close to zero for decades, and if the US Federal Reserve were pushed into a big rate cut to fend off an economic slump, that game of yield arbitrage would end up in a pincer squeeze of rates.
A rising yen brought on by the BoJ’s rate hike would’ve worsened losses for Japanese investors, who had invested enormous sums globally and risked getting that much less back upon conversion into their own money. A sudden unwinding of rate-gap-reliant bets followed.
Meanwhile, a stronger yen rattled Japanese stock prices directly too. After all, Japan’s big businesses are mostly export champions and their run of competitive exports and large profits on the back of a weak yen was suddenly drawing to an end. Rarely have we seen such a drastic re-rating of prospective earnings.
As blue chips crumbled, knock-on effects kicked in. Large lumps of Japanese money invested in foreign markets began being withdrawn. Coupled with worries of US woes causing a global slowdown, it was enough to spook traders everywhere.
Also read: Asian markets rebound, Nikkei jumps over 10% after a crash into bear market
Some of it was probably an over-reaction. But let’s face it. Even if hindsight offers some clarity on Monday’s shake-up, it’s all but impossible for retail investors to stay clued into such financial dynamics. This episode, therefore, holds forth an important lesson: Don’t try to time the market.
Past trends could be a poor guide to its future trajectory. Regardless of India’s economy doing well, global gloom could outlast a short investment horizon. To ride out price volatility, it’s advisable to make gradual investments and average out one’s overall returns. Mutual funds offer a good way to do so.
If held for long, they hold the promise of inflation-beating gains. As for stock pickers, wisdom lies in sticking to the straight and narrow. Invest in businesses that generate earnings and whose shares are priced reasonably, and then stay invested for dividend income year after year. In stock markets, short-cuts don’t work. It’s best to go by the basics.
