Shocks Rattle The Markets, Recoveries Happen Soon After

Shocks Rattle The Markets, Recoveries Happen Soon After

Local or global events have the power to rock equity markets over the world but they should not be the cause for panic among investors. Geyatee Deshpande finds out how markets have recovered in the past whenever shocks and contingent events have impacted markets negatively. There is a lesson to be learned here by long-term investors 

Equity investors, from time to time, are faced with contingent events and shocks that threaten to shake, rattle and roll the markets. The impact in the initial phases of such events or shocks on investors’ sentiment is such that investors start believing this may well be the end of a good run for the markets and that there may be no treatment for such a malaise. In fact, doomsayers enjoy such moments when they proclaim that the curtains on the markets are now down forever. However, guess what, the initial fears of investors have almost always been proven wrong by the markets. That is because each time any contingent event – global or local in nature – has impacted the equity markets negatively, there has been a steady recovery in the markets.

At times the markets may have taken longer to recover than usual but the fact remains that they have always recovered. This is something that every long-term investor should bear in mind. To cite an example, the recent shock faced by global equities comes from the crisis in the Middle East region where war clouds seem to be forming fast what with the hostilities between certain nations on the increase over the past few weeks and the probability that the scenario may escalate soon. Initially, the Indian markets, matching the sentiments of the global equities, sharply reacted negatively to the development.

As such, the erosion was quick and the Indian markets were seen trading down immediately after the developments. BSE Sensex was down by nearly 2 per cent after the news triggered a market correction in the US’ markets. Sensex, from the levels of 41,464 on January 3, touched a bottom of 40,476 on January 8 on an intraday basis, thus indicating a fall of almost 3 per cent in 2-3 trading sessions. However, the Sensex climbed back with a sigh of relief and was trading above 41,450 as on January 9 – thus indicating recovery in only four trading sessions from the time the global events delivered a punch to the equity markets.

Market Shocks and Impact 

Over the past few years, we have seen markets being impacted by various shocks emerging from different parts of the world. At times the market correction is triggered due to local events while at times this may happen due to a combination of both local and global events, as was the case in the year 2016 when the Sensex crashed by 1,689 points on account of the Indian government’s announcement about crackdown on black money. It resulted in frantic selling in the equity markets. Sensex slipped by 6 per cent to 26,902 and Nifty dropped by 541 points to 8,002. This fall was partially explained by demonetisation and in parts due to weakening rupee and the US’ presidential election. Globally, the equity market corrected as well with US’ markets falling nearly 5 per cent.

If we look at the data in the table we find that the markets have not only recovered 100 per cent of the times after being impacted by shocks but also recovered quite fast. If we factor in various market shocks such as the US-China trade war, implementation of Long-Term Capital Gains Tax (LTCG), demonetisation, Chinese stock market crash, Japanese tsunami, Lehman Brothers’ collapse, political uncertainty, terrorist attacks or the dot-com bubble going bust since 2000, we find that the Sensex has corrected by 3.59 per cent in a single trading session post the market shock if we consider the median figures. If we consider the median for the bottom that the Sensex touched post various market shocks, we find that it corrected around 9 per cent.

The most interesting aspect that we can glean from the above table is that it takes close to 83 days to recover all the losses once the markets are impacted by such shocks. This goes to show that every market correction triggered by shocks turns out to be a buying opportunity for long-term investors. Commenting on this market reality, momentum investor Vivek Diwate says, “Some of the best times to invest in stocks are when the markets fall between 5-10 per cent. Unless there is a serious damage to the market structure and the long-term trend is punctured, chances are very bright that the stock prices will recover in no time.”

“In my experience, a market correction due to a macro event or global shock is the best time to accumulate portfolio stocks. Trend analysis is important and focus on quality is most relevant in such times. The idea is to then bet on quality stocks indicating better relative strength. It works in most cases and one can beat the markets while undertaking a more calculated risk,” he adds. The only problem while participating in markets during any such distressed environment is that the volatility is heightened and spike in volatility is something that scares the best of traders and investors. Most investors make the mistake of averaging on their already held poor stocks while the trick is to buy quality stocks when the markets have corrected close to 10 per cent.

Conclusion 

In the most recent global critical event, the assassination of Iranian Major General Qasem Soleimani of the Islamic Revolutionary Guard Corps (IRGC) spooked the global equity markets since it was the second most important event in the history of the US-Iran conflict that has spanned four decades. However, despite all rhetoric between both the US and Iran, a full-scale war between the two hostile countries is unlikely. That is the exact reason why we have seen recovery in the Indian equities in line with the global equities. Long-term investors can use such market correction whenever the prices fall anywhere in the range of 2-10 per cent. As the mid-caps are outperforming, there are signs that the year 2020 is going to be a better year for investors. Given the above explanation, investors can use any market correction triggered due to a shock or a contingent event for building long-term portfolios and generating excess returns, albeit with caution. 

Keep in mind that such events also trigger increase in volatility and may punish unprepared investors.

 

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR