The drama of falling emerging market (EM) currencies taught us some lessons. The lessons were long overdue. Just that the lessons taught us what we already knew. We can’t follow the monetary policies of America which, simply labeled, is ‘bad economics’. If we keep on overspending on stimulus without managing our macros well, we will get the whack. Simply put, we are no more than just another EM. A market economy that gets a share of global investments, we compete with a whole lot of other EM nations to get our share of global investment flows. The faith the global investors show in us is constantly reviewed. We are a nation on watch. Just that the UPA acted like the Emperor in his new clothes and paraded around the world seeking investments as if we are the only alternative for global investors among the EMs. When America talked of ending QE, we instantly came under closer scrutiny. The punishment was instantaneous. Now, that America is set to walk the talk, we need to see how events pan out. Is the end of QE discounted already in EMs or is there more tumult awaiting us? The worry is that our stimulus is not ending anytime soon with elections around the corner. The coming weeks will tell how the world views India.
Market sentiment is a poor driver of long term investing.
Events often impact market valuations in a way that affects investor behavior. Confidence tends to get impacted by event risks and leaves investors maimed and frozen in action. Often, investors go inactive when they must be acting with conviction. How can one show conviction when events are scary? The simple truth is events come and go. Economic fundamentals are far more consistent and predictable. So, predicting events and investor responses to them may at best be exciting. But, their productivity to your investment outcome will be marginal. Economic fundamentals change more slowly and decisively making it far easier to anticipate them. This is precisely why investment analysis works better when primacy is given to economic analysis. Politics is a distraction to serious investing and overly focusing on it will leave you behind in the investment race. Better business judgment doesn’t need better political sentiment.
Before sentiment recovers, your confidence needs to grow.