Global market dip and dive game

On May 23rd, 2013, Thursday, Japan’s index Nikkei plunged by 7.3% in a day. The drop in Japan's Nikkei 225 index was the biggest one-day drop since Japan was hit by a devastating tsunami more than two years ago. While there is no clear reason for the plunge, some factors that led to the fall were the news of manufacturing activity in China contracted and mixed messages from the U.S. Federal Reserve about when it may start withdrawing some of its monetary stimulus.

Does the Nikkei fall affect India? Yes, because like a house of cards the Sensex too fell by approx. 387 points on the same day due to the kamikaze dive by the Nikkei.

The levels at which Nikkei fell on 23rd May, 2013 was 14,483.98, this was very close to the levels it was just 10 days before the ‘great crash’ at 14285.69 (source: Bloomberg). It looks like Japan had a brief joy run and crossed the 15,000 mark during this period. The Japanese central bank’s decision to double the money supply and achieve a 2 per cent inflation target within about two years proves to be the real concern.

The gambit, the brainchild of Japan’s Prime Minister Shinzo Abe, ironically referred to as "Abenomics", is another attempt to indulge in a fresh round of government spending and drastic monetary easing designed to end 15 years of deflation. Looks like Mr. Abe seems to have lost the race even before it actually starts.

Basically he devalued Yen by pumping in artificial money in order to make their exports cheaper. When a currency declines in value, goods produced within the nation become cheaper for foreigners to purchase. A devalued currency can give country major advantages in terms of trade and help to boost domestic growth and improve the balance of payments.

Pumping easy money in the economy in order to spur price rises, spending and borrowing in an economy that has stagnated for years, will only bring smile to the Nikkei for a short period of time. Eventually for the financial system to grow, it needs more constructive and genuine measures. Japan needs organic growth. Once the pinnacle of innovative technology, and the envy of the world, the Japanese entrepreneurs of today need to rediscover their innovativeness to grow naturally and not depend on their central bank and government to print more money to bail them out.

It is like giving a child who is consistently performing below average in his academics grace marks to pass and clear the term, only for him to succumb during his Board exams.

And across the globe we have countries in Europe and the US, monitoring the situation as they have already started printing large amounts of money and are readying themselves to plunge into the muddy waters that Japan is swimming in at the moment. If Japan can keep its head up, there will be a lot more players in the pool following ‘Abenomics’. Coming back to India however, FIIs have brought in a net total of over $14 billion so far in 2013. Cause for joy? Not necessarily. With their pockets bulging with freshly printed ‘artificial’ money; the so called developed nations will look overseas to invest the surplus cash which will eventually find its way to a ‘developing’ market like India. Watch Ajit Dayal’s (Chairman, Quantum Asset Management Company Pvt. Ltd.) views on Indian economy.

The long term horizon looks bleak, as eventually, due to factors in their own economies or the drying up of the artificial pool of money, these FII’s could just as easily pull out of India, potentially causing another stock market slide, and thereby the erosion of your savings.

At Quantum Mutual Fund, our Investment teams try their best to not let these domestic and international factors affect your investments too much. Quantum believes that following strong process irrespective of market movements will eventually lead to superior fund performance, thereby cushioning your portfolio from shocks – domestic or international.

With a more conservative approach we at Quantum, think it is more important for a fund to deliver good returns on a risk adjusted basis. A bottom-up stock picking process and no bias towards any particular sector, our stock picking criteria remains a good business model and strong management plays an important role in stock picking process.

As a fund house, our Investment teams believe that there is no harm in holding cash when they don’t see good valuations in stocks, similarly when the markets are down and the valuations are right, the team is more than happy to be fully invested.

Therefore, even though the global cues remain fragile, when it comes to your investments all you have to do is stay calm and keep invested in mutual funds.

Data Source: Live Mint and Bloomberg