Market Psychology - A Tale of Many Numbers

I have been on the road for some time now traveling across many parts of the US and Canada. The interest in India - and other emerging markets - has increased over the past few months. Rising markets have this strange ability to attract more money. If you really think about it, people should invest when prices are low - when markets have fallen. But human nature and investor psychology being what it is - the higher the share price, the more the interest in the stock! Everyone wants a ride on the gravy train.

The good thing about my travels, though, was that my last name did not attract any attention from the immigration officials in USA. Though I did have my "please step aside" moment about 2 years ago at Miami airport. There were others ahead of me in a large waiting room. We were called in order by an officer armed with a computer and equipped with a gun. A few questions on why I was visiting, where I was staying, and then a few clicks of the mouse and a few stamps before I was told "Hope you enjoy your stay here". The entire process did take an hour, though, and I would rather have spent that time somewhere else. But we all have a job to do and the US Immigration was doing theirs.

Just as money flows are doing to stock markets what money flows are supposed to do.
When people buy with greed, markets rise.
When people sell in fear, markets fall.

Egged on by these foreign inflows of USD 2.2 billion from FIIs (much of it short term money and some of it long term capital) and buy orders from local funds, the Indian stock markets gained ground in July (+7.8% in US Dollars). So far, the Indian stock markets have gained +64.4% in the year-to-date (YTD) through July 31st. Not bad for a 7-month return.

Though the Indian stock markets underperformed the MSCI Emerging Markets Index in July (see Table 2 below), they are ahead for the 7 months of this year.

And how does India compare with its larger peers within the emerging markets: Brazil, Russia, and China?
Well, based on the MSCI BRIC Index (see Graph 1 below), India managed to outperform only Russia.

A good year - but can it end badly?

But this is no time to calibrate where individual markets and asset classes are. While many went on their annual vacation in the western world - with anxious Blackberry a quick touch away - the markets gave everyone a warm fuzzy feeling.
This is the first time in calendar year 2009 that all the Indices and asset classes tracked in Table 3 below have a plus sign ahead of them.

This table has a lot of information in it, so spend some time on it.
India is lagging Brazil and China in terms of returns in July and also for the year-to-date.
But, since the world began to re-price and reassess risks (the extreme right column), India (-12.8%) has lagged Brazil (mostly due to currency movements - the Brazilian Real has gained ground against the US Dollar) and is a whisker ahead of China (-13.1%) and has done way better than Russia (-47.8%).

Note that Gold is up +43.6% over the same time period. It should remain an essential part of any investment portfolio.

In August 2007, two hedge funds belonging to Bear Stearns - a well established finance company - blew up. This was the first flapping of the wings of the butterfly. Eventually, Bear Stearns went bankrupt as did Lehman Brothers in September 2008. But August 2007 was when some fears over the extent of unknown risks taken to get unknown returns began to seep into the minds of global investors.

While China and Brazil have - so far this year - benefited more than India from the perceived global economic recovery (in terms of share price movements) any change in perception could see a faster decline in those stock markets. But India is still hostage to foreign short term flows of speculative money and there is no doubt that the Indian markets will be hit by "FII selling".

And India has its own set of problems: from the drought to a questionable policy making process.

So, while swine flu dominates the press, the China Cold could be more of an irritant.

Maybe it is time for some Indian academic to write a report on why China - broken up into 25 independent countries - would be less dangerous for our portfolio returns. J

Till then, keep with the asset allocation; don't panic when others do; and let's keep praying for some rain.

Disclaimer : Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments

Note: This article was first carried on www.equitymaster.com

Above article is authored by Quantum.

View All