Corona virus and its new variants often cause volatility in stock markets.
News channels and social media channels are actively covering the UK Corona Virus and the steep fall in Sensex today.
The Health Secretary of UK , Matt Hancock confessed that the new mutant of the virus has gotten out of control, and the country is witnessing decreased response of patients to plasma infusions. This generated fears of re-lockdown, and further slowing down of national and international economies.
India and 27 European nations including Italy, Germany, France, Hong Kong and Canada have cancelled incoming flights from UK till December 31st, 2020 and have made fortnightly isolation compulsory for travellers coming from the United Kingdom.
The steep fall in Sensex was perhaps worse than the looming threat of a second lockdown, and consequent derailment of an economy which had just started showing a positive outlook.
Scientists still claim that the vaccines will remain effective to counteract the new mutants of UK Corona Virus. Yet, local versions of fear prevail.
I call it a local version of fear for specific reasons.
The Indian stock markets were at a high owing to
- Inflow of capital from foreign portfolio investors
2. Positive outlook predicted for economy
3. Announcement of vaccines
4. Results of US Elections
5. Diversion of funds to stock markets, in absence of profitable business opportunities
Today’s fall is being viewed as a godsend trigger, happily clutched by sellers waiting to book profits. It led to an overdue market correction, as the Sensex was not reflecting the real state of the economy.
However, cancellation of flights from UK may see some damage repair tomorrow.
There are plenty of bears in the market to welcome this opportunity.
INVESTOR BEHAVIOUR THAT CAUSES VOLATILITY IN MARKETS
1. Recency Bias
Investors go by the last piece of news available, rather than seeing the picture in its entirety.
2. Confirmation Bias
The second and third waves of Covid19 in states like Gujarat, Rajasthan, MP and Delhi generated fear, which was not being expressed. Festival seasons pose a threat to disease control, as partying and socialising rises. A fun-starved population will grab any opportunity to go out and celebrate.
Weddings held up due to restrictions have started happening.
The UK Corona Virus just became the last straw on a terrified camel’s back.
3. Predictions by experts/fund managers
Some fund managers have advised investing less, other than in Asset Allocation funds and Balanced Advantage Funds.
The investors don’t really know whom to trust after exposure of erroneous decision-making for a prolonged period, by Franklin Templeton fund managers. Yet, they choose to believe the worst and decide to play safe.
4. Short-term trading in volatile markets
Both a steep rise and fall in the growth curve are usually caused by short-term traders.
The average long-term investor is invested for specific goals, which are not going to alter or disappear overnight.
WHAT SHOULD THE AVERAGE INVESTOR DURING VOLATILITY IN STOCK MARKETS?
1. Stay invested
If the investments are part of a financial plan done to meet specific financial goals, the same should continue. There is no reason to stop SIPs or pull out of schemes with low returns.
2. Do not let all your efforts be wasted
Mutual fund gains are the difference between the selling price and purchase price, and selling at a low, will neutralise the efforts of saving and investing made in the last couple of years.
Let the volatility pass.
2. Sectors to invest in
Do not make fresh investments in tourism, aviation or hospitality sectors as these are not likely to pick up till next winter.
Instead, continue to invest in healthcare and technology. The lifestyle changes induced in 2020 may become a way of life. The demand for preventive healthcare products and services, and technological products will continue to boom. Sale of household gadgets will remain on the upswing, as domestic help gradually becomes dispensable.
Automobiles may see a comeback as people prefer to drive in their private vehicles rather than take public transport.
All in all, stay calm and stay invested. Let the volatility not pollute mindsets. We have suffered enough in the last 10 months.