The sharp slump in the stock market has got everyone to arrive at conclusions. ‘Dooms day’ theories floating around social media and in the press are galore. A section of writers is going to the extent of calling out the death of capitalism and stock markets. Whenever there is panic, emotions fly around thick and fast.
Some voices warned of an imminent fall when share prices move upward irrespective of weak fundamentals driven by cheap money. Yet, near-zero interest rates in rich countries drove asset prices higher and higher. The so-called easy money unleashed to tide over the pandemic was the reason. Printing money cannot be an endless exercise. Governments cannot borrow money and not think about repayment. At some stage, the cycle had to turn.
In all fairness, central banks in the US and Europe gave enough warnings to markets about the tapering of bond purchases. The US Federal Reserve, America’s central bank, bought bonds at low-interest rates and released money into the system. However, these bond purchases will slow now. At the same time, interest rates would be raised sharply to curb the money supply and check inflation.
In India, the consumer price inflation was at the highest level last week in eight years. The monetary policy committee of the Reserve Bank of India has already hiked rates and increased the necessary reserve ratio to absorb surplus money from the system.
However, significant drivers of inflation in India are the prices of international oil and food. While oil prices are moving in a range now and not surging, food prices are rising despite India producing record food grains every year thanks to the normal monsoon. For example, India was supposed to export wheat as global supplies were hit due to the war in Ukraine. Russia and Ukraine account for more than a third of global wheat exports. India consumes most of the wheat domestically and is not an active exporter.
A few months ago, prime minister Narendra Modi suggested that farmers should seize the wheat export opportunity. However, the government announced a ban on wheat exports last week. That tells the story of the government trying to secure supplies to the domestic market to curb a surge in wheat prices.
The action also indicates that things are unlikely to be expected in the global food supply situation as Russia continues to pound cities in Ukraine. Besides wheat, Russia and Ukraine are vital players in the global edible oil, seeds and corn supplies. Overall, it is terrible news.
What you must do
The turmoil in the equity markets is likely to continue as foreigners pull out more money from markets like India. You need to arm yourself with adequate knowledge to understand the cyclical nature of markets. When share prices move, there is no one reason for that change. It depends on your ability to understand the underlying factors.
It is also about your temperament. If you observe the long-term trend in the stock market, share prices tend to move in line with the profits of businesses. If companies do good business and make money, share prices toe the line despite shock events like the Covid-19 pandemic, supply constraints due to trade wars, geopolitical tensions, and other natural or artificial disasters. There are many new investors in the stock market. They are either investing directly or through mutual funds or index funds. Equity investing is not about the short-term. Your money needs time to grow.
As a new investor, you must focus on learning about factors that influence share prices. Inflation is the enemy of your money. It eats into the value of your wealth. However, you need to invest in companies whose share prices are beaten down but can win over rising inflation. These businesses have a strong balance sheet and can continue to sell their goods or services despite rising costs. Such companies have a ‘pricing power in the market. They are good at things they produce and serve their customers well. You must learn to shepherd your thoughts towards such businesses in times of turmoil.
Inflation - the enemy
Inflation is the enemy of money. It eats into the value of your wealth. However, you need to invest in firms whose share prices are beaten down but can win over rising inflation.
(The author is the editor-in-chief at www.moneyminute.in)